The coronavirus epidemic has sparked a bond bonanza in China, with financial institutions and companies rushing to sell debt at low interest rates.
Since early February, more than 150 Chinese companies, including manufacturers, airlines and property developers, have collectively raised over 237 billion yuan ($34 billion) by selling so-called coronavirus bonds, which devote a portion of their proceeds to “epidemic prevention and control” efforts within the country.
The pace of issuance has picked up as more companies have found they can borrow money cheaply this way. Average coupon rates on the new securities—which mostly range from 1.6% to 6%—have in many cases been lower than yields on comparable outstanding debt from the same issuers, according to Wind Info., a data provider.
State-owned banks have been the main buyers of the virus bonds, according to market observers.
“They are buying the debt that other investors don’t want to touch, helping to push down the yields,” said Jason Tan, a research analyst covering Chinese financial institutions at debt-research firm CreditSights.
A man’s temperature is taken inside the Shanghai Stock Exchange building in late February. Photo: aly song/Reuters In essence, state-owned lenders’ acceptance of lower interest rates amounts to a backdoor subsidy for Chinese companies, including many private enterprises. Purchasing the bonds enables banks to channel more liquidity to businesses that are reeling from deep sales declines, supply chain disruptions and other interruptions caused by the coronavirus epidemic. Despite their label, most of the coronavirus bonds’ proceeds are being used to refinance companies’ existing debt, which is helping them avoid defaults.
Anti-epidemic bonds accounted for about 20% to 30% of total nonfinancial yuan bond issuance in February, according to a research report from Hua Chuang Securities, a domestic brokerage.
As of Wednesday, 80,270 cases of the Covid-19 disease had been reported in mainland China since late last year. Of those, 49,856 people have recovered and 2,981 have died. Newly released Chinese economic data already points to a deep slump, and many businesses are facing labor shortages or can’t manufacture or sell their goods because factories are closed and logistics networks are jammed up.
In early February, when the spread of the pneumonia-causing respiratory virus was accelerating in China, the country’s financial regulators said they would ease the way for affected companies to issue bonds. They pledged to grant faster approvals and greenlight the issuance of more corporate debt.
Coronavirus and trade tensions are testing the stability of global supply chains. While that’s pushed some businesses to consider loosening their ties with China, WSJ explains why leaving the “factory of the world” is easier said than done. Photo: China Daily via Reuters Days later, a national supervisory organization that oversees China’s bond markets said companies in Hubei province, or in industries heavily hit by the epidemic, could get fast-track approval for what they called anti-epidemic bonds. Businesses nationwide that are involved in efforts to contain the epidemic—or that plan to use at least 10% of the funds raised to do so—would also qualify.
This prompted a flurry of companies to sell short-dated and long-term bonds. Many of them are using the bulk of the funds for general purposes or to pay down outstanding debt; they say they intend to use some proceeds to fund activities like mask manufacturing, disinfectant purchases, or making donations to hard-hit communities.
Huarong Xiangjiang Bank Corp., a small bank in the south-central Chinese province of Hunan, in February raised 200 million yuan by selling a one-year bond. It said it plans to make small loans to local hospitals and pharmaceutical companies. Even Hengfeng Bank Co., a troubled regional lender that last year received a government bailout, raised 1 billion yuan by selling an anti-epidemic bond.
For coronavirus corporate bonds with a domestic credit rating of AA+, a category that many Chinese industrial companies fall into, coupons have on average been about 0.3 percentage point lower than comparable outstanding debt, said Zhang Shuncheng, a Shanghai-based analyst at Fitch Ratings. Fitch doesn’t currently rate onshore Chinese debt.
BOE Technology Group Co., an Apple Inc. supplier that is a major producer of liquid-crystal display screens, last week raised 2 billion yuan from a sale of three-year bonds with a 3.64% coupon.
The Beijing-based company said in a prospectus that it plans to use 300 million yuan to support a production plant in Wuhan, the epidemic’s epicenter, and new construction at the site. The rest of the money raised would go to its subsidiaries in other parts of the country.
Shenzhen Airlines, a domestic carrier, raised 2.3 billion yuan from bond sales that will help it refund money to people whose flights were canceled, purchase epidemic prevention materials as well as cover its fuel costs, employee salaries and other maintenance charges.
While the vast majority of coronavirus bonds have been sold within mainland China, global banks last week helped facilitate a sale of similar of “Covid notes” offshore.
The Macau branch of Bank of China Ltd. raised 4 billion Hong Kong dollars ($513.2 million) from a sale of two-year bonds that were priced to yield 1.95% and a smaller sum in Macau’s currency. It said it planned to use the proceeds to help fund projects that would benefit small and medium-size enterprises in the semiautonomous city that have been negatively affected by the coronavirus epidemic. Banks bought more than 80% of the notes, according to one of the underwriters.
—Zhou Wei and Serena Ng
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