By Lu Jianxin and Pete Sweeney
SHANGHAI (Reuters) - A long list of high-yield bond issuers are due to make debt payments in May in the $8 trillion market, which is pricing in increasing risks following an unprecedented number of defaults this year.
Nanjing Yurun Food Co Ltd, a unit of China Yurun Food Group Ltd (HK:1068), and fertilizer maker Inner Mongolia Nailun Group are among recent companies that announced debt payment problems.
Reuters Eikon data shows there are 28 bonds yielding more than 10 percent that have coupon payments due in May, representing around 17 billion yuan ($2.62 billion) of capital. In June, coupon payments on another 8 billion yuan of similarly yielding bonds are due.
"Company operations have become increasingly difficult, making bond issuers faced with increasing pressure to pay off their debt," said a senior trader at a Chinese state-owned bank in Shanghai. He declined to be identified because he is not authorized to speak with the media.
An unprecedented number of more than 20 bond defaults have been confirmed so far this year as many companies feel the pinch of China's economic slowdown.
Chinese companies, with ever more cash tied up in inventories and unpaid bills, are facing their tightest liquidity crunch in a decade, according to a Reuters analysis.
"With more credit events happening, it is possible that onshore agencies will issue more downgrades and that could further reprice the credit bond market," said Yang Chen, China rates strategist at BAML.
Some analysts in China, however, suggest about 500 bonds worth around 700 billion yuan ($108 billion) are at high risk of failing to meet due payment dates.
Reflecting these concerns, the spread between AAA and AA-rated one-year corporate bonds widened to as much as 47 basis points earlier this month, Thomson Reuters data shows.
Bond stress has encouraged some flight by investors into commodities futures markets, where prices have surged this year.
RISING YIELDS
Yields of benchmark one-year corporate notes <AA+CNCP1Y=RR> have jumped an average 35 basis since late March. Benchmark five-year corporate notes <AA+CNMT5Y=RR> have surged nearly 60 basis points since early April.
Over 100 Chinese firms delayed or canceled at least $15 billion in onshore bond and other fixed-income issuance in April.
Frances Cheung, head of rates strategy at Societe Generale (PA:SOGN) in Hong Kong, said the increase in stress was spilling over into the domestic interest rate swaps market.
"Basically the credit bond market is not entirely liquid and so people may be turning to swaps to hedge against default risk or simply the risk of higher yields," Cheung said.
However, at the same time many state-backed issuers have flooded the market with bonds to rollover debt and finance infrastructure at low rates, as investors reward issuers seen as having implicit policy backing to prop up growth.
"The central bank (monetary policy) also looks less aggressive right now, which could trigger a little bit of deleveraging and a widening of spreads, especially for credit bonds," said Zhou Hao, senior emerging market economist at Commerzbank (DE:CBKG) in Singapore.
"From the central bank's point of view, it's justified, because it needs to see how inflation develops, but the bond market is kind of a victim of this wait-and-see policy."