Financial risks remain elevated for China's top corporates: S&P

HONG KONG - The debt servicing capacity of China's top corporates continues to weaken, according to ratings agency Standard & Poor’s. Although the deterioration has slowed, stress is building on the credit profiles of top corporates due to sluggish demand, weak pricing, and high leverage, S&P says.

"Debt leverage in nearly all sectors has climbed consistently over the past
several years," says Christopher Lee, a credit analyst at Standard & Poor's. "Weak commodity prices and the property market correction exacerbated the trend by undermining the profitability of a wide range of sectors exposed to investment demand."

Some sectors initially benefited from lower commodity prices but quickly gave up the gains as weak prices fed through to weaker pricing and sluggish demand, S&P says. This effect has been more pronounced for sectors that suffered from over-capacity, such as metals and building materials.

Utilities bucked the trend in recent years as the only sector to post improvements in leverage and debt servicing, although from weak levels. “Even so, the improvement seems to be losing steam as tariff adjustments are tracking weaker input costs, and electricity consumption growth slows.

“We expect leverage to increase by the end of 2015, and see limited prospects for improvement in 2016. Debt to EBITDA leverage is likely to increase towards 5x from about 4.5x at the end of 2014 and about 2.6x at the end of 2008, in our view.

Corporates should benefit from lower interest rates and improved liquidity in the onshore credit markets. This will lead to improved interest coverage as debt is refinanced at a lower cost.

In our view, there is still scope for interest rates to be lowered as inflationary pressures are low. The abundant liquidity should ease refinancing risks for corporates with good credit quality in the next 12 months.” www.standardandpoors.com (ATI).