Moody's says credit differentiation to widen

Credit differentiation is set to widen across China's onshore bond market in the aftermath of the coronavirus outbreak, Moody's Investors Service said in a recent report.

The pandemic created unprecedented shocks for many companies, resulting in declining profits, reduced cash buffers and higher leverage, as well as funding difficulties for some amid credit differentiation.

The pace of recovery following the coronavirus disruption will vary across sectors, especially if government relief measures subside, and the rating agency expects credit differentiation to widen as a result.

For sectors that can recover sooner, such as construction and engineering companies, additional short-term credit can meet their working capital needs and revenue resumption will help to counter debt servicing pressure.

For sectors with operating conditions impacted for a prolonged period because of a change in consumer behavior and/or travel restrictions, such as offline discretionary retail and hospitality, short-term liquidity access will not be sufficient to weather the down cycle, especially for companies with weaker operating and financial fundamentals.

Investor risk aversion to financially weak privately owned enterprises will continue and appetite for long-term risk has not resumed, which exacerbates refinancing pressure, Moody's noted.

Weak privately owned enterprises in sectors more exposed to the pandemic will have the highest liquidity risk, according to the report.

Many issuers took advantage of ample liquidity and low interest rates from February to April to tap the onshore bond market to meet funding and refinancing needs, which resulted in a sharp rise in monthly issuance and net financing in March and April.

The issuance momentum cooled down in May and June because issuers were more sensitive about funding costs as yields rose and they had less imminent funding pressure.

Nevertheless, Moody's expects policies to stay accommodative in the second half of the year to ensure reasonable credit supply and promote efficient and targeted supply to companies in need of liquidity.

Issuance pace may also slow down relative to the first six months but overall issuance in 2020 will still exceed last year's record level.

Meanwhile, foreign investment in China’s onshore bond market surged in May amid a global liquidity boost from governments' quantitative easing measures that drove investors to seek diversification and yield opportunity, and the country's early signs of economic recovery from coronavirus.

The outstanding amount of yuan bonds held by foreign institutional investors reached a record 2.5 trillion yuan (US$358 billion) at the end of June, the report adds.