China’s Communist Party warns about debt

China’s leading Communist Party mouthpiece ‘People’s Daily’ interviewed an unnamed person who warned about the country’s rising non-performing loans and the risks associated with it.

The interview stated that the country should make deleveraging its top priority over short-term growth fueled through monetary easing policies.

The daily also made a reference to Premier Li Keqiang’s thought on banks swapping debt for equity to cut excess borrowing by Chinese firms. The daily stated that whilst bankruptcies were to avoided, “zombie” companies beyond salvage should be allowed to fail because debt-to-equity swaps would be costly and self-deceiving.

Separately, Fitch Ratings warned that China’s accumulation of debt and diminishing economic returns could spiral the nation into either a financial crisis or a Japanese-style growth slump. Further, a spike in mortgage lending meant that banks could be exposed to significant losses if property prices dropped sharply.

Brokerage firm CLSA also warned that actual NPA’s in China could be at least nine times higher than government’s quoted figures, suggesting potential losses of c.$1tn.

Source: Bloomberg

McDonald’s issues EUR 2.5bn MTN; rated BBB+

McDonald’s Corp.’s multi-tranche debt issuance was assigned a credit rating of BBB+ by Fitch Ratings, with a negative outlook. The EUR2.5bn issuance includes four-year, seven-year, and twelve-year fixed-rate senior unsecured notes.

The issued notes, which rank pari passu with the company’s existing debt, are being issued under its global medium-term notes program dated 13 November 2014.

The notes do not include financial covenants. Proceeds would be utilized for general corporate purposes, inclusive of share repurchases.

Source: Businesswire

S&P lowers outlook on China; says domestic-led economic growth moving “slower than expected”

Ratings agency S&P lowered its outlook on China’s credit rating of ‘AA-‘ to negative from stable, citing the Mainland’s attempts to overhaul its economy from an investment-led and export-oriented one toward domestic-led growth was proceeding at a slower pace than expected.

The move follows that by Moody’s, which lowered its outlook on China to negative earlier in March 2016 for its credit rating of Aa3. Fitch Ratings rated China as ‘A+’ with a stable outlook.

As part of its rationale on the lower outlook on China, S&P outlined the following reasons:

  • gradual increase in economic & financial risk to the government’s creditworthiness
  • weakening of sovereign and corporate credit metrics
  • increased reliance on credit to push the sluggish economy

Source: WSJ