Deleveraging Drive Could Boost Corporate Bond Defaults


China’s earnest deleveraging campaign could raise the likelihood of default by corporate issuers given the abrupt and opaque nature of the curbs imposed by regulators.

Chinese regulators have clamped down on the issuance of offshore corporate bonds as part of an ongoing deleveraging drive intended to address the onerous debt levels accumulated since the GFC.

The crackdown commenced in earnest in April, with the National Development and Reform Commission announcing that it would refrain from approving new foreign debt issuance by real estate developers and local government financing vehicles.

According to S&P Global Ratings, however, the heavy-handed nature of such curbs threatens to raise the likelihood of default for those companies that need to roll over maturing debt, especially given that the two sectors targeted are those most strongly associated with potentially calamitous debt problems.

“It could cause some of these issuers to go into distress,” said Christopher Lee, managing director of corporate ratings at S&P in Hong Kong to Bloomberg.

NDRC is further stepping up its regulation of offshore corporate bond issuance, dressing down a number of companies earlier this month for their failure to perform proper registration.

The opaque nature of NDRC’s restrictions and uncertainty surrounding the basis for future approvals has heightened jitters amongst issuers, with the likelihood of default or distress set to increase if┬árestrictions continue for too long and alternative sources of funding prove scarce.

NDRC’s restrictions are also impacting the Asian dollar-bond market, given the importance of China’s economy, causing buyers to shift away from Chinese supply due to concerns over arbitrary conduct by regulators.