Refinancing risk in China is increasing for some finance firms, as increased borrowing in recent years have led to a lumpy debt maturity structure for many, said Moody’s recently.
China's accommodative monetary policy, the development of its capital markets and the business expansion of recent years have lifted leverage among finance companies, said Sean Hung, a Moody's Vice President and Senior Analyst.
“Many have used infrequent but large issuances of bonds with tenors between two-to-three years for funding, leading to debt maturity clusters in future years,” Hung observed.
Small finance companies, in particular, will face greater liquidity stress, because they are only allowed to issue bonds in the less liquid corporate bond and exchange markets, he added.
Finance companies looking to refinance will face higher funding costs as China begins to tighten monetary policies and as investor risk aversion rises on expectations that more corporate defaults will occur in coming months, according to Moody’s.
Many finance firms have access to remedial measures against refinancing risk in China, but the effectiveness of the measures will vary, the credit rating agency noted.
For instance, the use of external credit enhancements to support bond issuances can facilitate refinancing, but they do not change the receiving finance companies' credit strength and liquidity management, Moody’s noted.
On the other hand, improved liquidity management by some companies to better match their liabilities and assets has helped reduce the volatility of net cash flow from operations and the burden of having to refinance their liabilities to support the full tenor of their assets, the firm added.
