Beijing’s state-owned infrastructure companies face a record amount of bonds maturing next year as China’s capital city pays the bills for the $70 billion 2008 Olympic Games.
Fifteen local government financing units based in Beijing must pay 16.2 billion yuan ($2.5 billion) next year plus interest to investors, breaking last year’s record 12 billion yuan, according to data compiled by Bloomberg. A further 11.6 billion yuan matures in 2013 and 37.6 billion yuan in 2014.
The debt is coming due as government efforts to control inflation cause corporate borrowing costs in China to rise to a three-year high of 5.92 percent this month, double the rate in the U.S. How Beijing deals with the bill, which dwarfs the estimated $15.3 billion budget for next year’s London Games, may set a pattern for more than 10,000 local-government financing vehicles across China with about 10 trillion yuan of debt.
“The Olympics was a spectacular event for China, but now Beijing has to deal with the hangover because of high borrowing to finance the event,” said Victor Shih, a professor at Northwestern University in Evanston, Illinois who analyzes China’s local government finances. “Bond yields are heading up, so refinancing will be much more costly.”
The yield top-rated companies must pay on 10-year bonds has risen 74 basis points, or 0.74 percentage point, this year to 5.88 percent and touched 5.92 percent on Aug. 4, according to Chinabond data. Borrowing costs for similarly ranked U.S. companies have dropped 84 basis points to 3.12 percent in the same period, Bloomberg data show.
Bad Loans
Concerns are increasing that local government financing units across China will struggle to pay their debts that total 10.7 trillion yuan, with 80 percent coming from banks, according to National Audit Office data published on June 27.
Standard & Poor’s estimates that as much as 30 percent of China’s lending to local governments may go sour, after a two- year lending boom that drove the nation’s economic-stimulus program by pumping money into roads, highways and railways. Standard Charted Plc said in July 18 report that the lending may end in a wave of bad debts and prompt the nation’s third banking bailout in less than two decades.
Beijing Infrastructure Investment Co., a state-owned company that helped build the city’s subway system including a line to the Olympic area, paid a coupon of 3.78 percent on 2 billion yuan of one-year notes in June 2007, Bloomberg data show. The company paid 4.35 percent on 4 billion yuan of similar-maturity bonds in March.
‘Severe Strain’
Beijing, a city of 19.6 million people, had total debts of 374.5 billion yuan at the end of 2010, 61.7 percent of which the central government has a responsibility to repay, the People’s Daily reported on July 21, citing the head of the city’s audit office. That compares with 303.3 billion yuan for the northeast province of Jilin, which has 27.4 million people, according to Caixin magazine.
The capital’s infrastructure financing units have also signed lines of credit worth over 500 billion yuan with China’s state-owned banks, according to data from their prospectuses.
“Beijing runs perennial budget deficits like most other cities in China, which means any sizable bond redemption would put a severe strain on the city’s budget,” Shih said by e-mail. Authorities will “need to be very inventive in repaying the coming waves of redemptions.”
Bird’s Nest
Gui Guan, an official at Beijing’s Finance Bureau, said the companies building the Olympics-related infrastructure were “commercial” and questions should be directed to them. He directed Bloomberg News to a National Audit Office report from 2009, which showed that the Beijing Olympic Games were profitable, with revenue exceeding what it said was a total cost of 19.3 billion yuan.
Beijing Urban Construction Investment & Development Co. raised 500 million yuan in November 2007 to help finance the Bird’s Nest national stadium, the Olympic Village and the Olympic Park, according to the prospectus for the bond.
The spread on the company’s 6.08 percent notes maturing in 2014 over government debt widened to a record 253 basis points on Aug. 11, from 167 at the end of 2010, and was last at 251, according to Chinabond prices.
Calls to Beijing Urban Construction’s offices yesterday seeking comment on the company’s debt weren’t answered.
Beijing Infrastructure, which said in a December 2004 bond prospectus that the Olympics “ushered in an unprecedented opportunity for rail construction,” has 27 billion yuan of bonds outstanding. The company has borrowed more than 61.4 billion yuan from 18 banks, with another 146.2 billion yuan in unused lines of credit as of Sept. 30, 2010, according to a prospectus issued in April.
City Subsidies
Repeated calls to Beijing Infrastructure’s offices seeking comment on the company’s refinancing plans went unanswered.
Beijing Capital Highway Development Group Co., a road builder, said in a prospectus issued last week that its “ability to pay its debts was weak” and that it was counting on subsidies from the city government to stay solvent. The company has 9.3 billion yuan of bonds outstanding and had borrowed 39.5 billion yuan from banks, including 18.8 billion yuan from Industrial & Commercial Bank of China, as of the end of last year, according to the prospectus.
An official at Beijing Capital Highway said the company doesn’t answer questions from the media over the phone. Faxed questions were not immediately answered.
Sovereign Risk
The cost of insuring China’s sovereign bonds against non- payment has risen 55 basis points this year to 123 basis points, the highest since May 2009, according to five-year credit- default swaps provided by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Rising default swaps suggest deteriorating perceptions of creditworthiness and declines show improvement.
Contracts on Greece, which spent more than 11 billion euros ($15.9 billion) to host the 2004 Olympics have risen 1,240 basis points to 2,250 in the same period. Greece’s debt is 143 percent of gross domestic product, according to data compiled by Bloomberg. The ratio for China is about 71 percent, Standard Chartered said in a June 29 report.
Credit-default swaps on the U.K., where the London Games start on July 27, have risen 10.5 to 84 in the same period, CMA prices show.
Curbing Inflation
“Given the low current indebtedness of the Chinese sovereign we think they have a large capacity to absorb” any losses on local government debt “as and when they occur in a manner that we think is consistent with their current rating,” David Beers, global head of sovereign and international public finance ratings at S&P, said at a briefing for reporters in Beijing on Aug. 22. S&P rates the country AA-, its fourth- highest investment grade.
China has raised interest rates five times since October and ordered banks to increase the level of reserves they set aside six times this year to curb inflation that accelerated to a three-year high of 6.5 percent in July.
The yuan declined 0.07 percent to 6.3930 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.3820 on Aug. 16, the strongest level since the country unified official and market exchange rates at the end of 1993.
China’s 10-year government bond yielded 3.951 percent yesterday. That compares with 2.266 percent for the U.S and 8.217 percent for India. The extra yield investors demand to own 10-year corporate notes in China instead of government securities reached a record 198 basis points on Aug. 15 and was last at 193.
Asset Stripping
The last two Summer Olympics left the host cities with underutilized facilities. The Bird’s Nest stadium is used occasionally as a sports venue, hosting AC Milan versus Inter Milan on Aug. 6 and the Beijing International Equestrian Grand Prix in May. Athens has leased out just six of the 22 venues used in the 2004 Games, according to former Finance Minister George Papaconstantinou.
Investors “should pay close attention” to what strategy Beijing takes as it tackles its debt burden, according to Northwestern University’s Shih.
It may involve “stripping cash-generating assets from the city’s other state-owned enterprises to help restructure the debt,” he said. “But when this is done, people continue to borrow and the pool of illiquid loans gets larger and more unknown.”
‘Old Wine’
China Chengxin International Credit Rating Co. put two bonds sold by financing vehicles in southern Yunnan province on its watch list last month after the announcement of a planned asset transfer. Sichuan Expressway Construction & Development Corp. was cited for violating rules in June after it transferred its stake in Sichuan Expressway Co. to another company.
The central government is working on a plan to allow local authorities to sell debt themselves, rather than having to use financing vehicles, starting with a 7.1 billion yuan quota for Shanghai and 6.9 billion yuan for Guangdong, excluding Shenzhen, Caixin magazine reported Aug. 22.
In the meantime, some of Beijing’s state-owned infrastructure companies are selling more bonds to pay off bank loans. Beijing Capital Co. said in its April prospectus that half of the 1.2 billion yuan it was seeking to raise would be used to retire bank debt.
“In principle there is nothing wrong with refinancing as long as you realize that it is old wine in new bottles, and the old wine hasn’t changed,” said Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing. “If it was not a good loan to begin with it is not going to become a good bond.”