海通证券股份有限公司 海通证券研究所
June credit spread monitoring: 1. Credit spread fell back, and spread between different ratings wassqueezed. From late May on, the bond market experienced a long-lost rebound, and credit spread fellconsiderably. This market trend started from high rating bonds before expanding to medium and low ratings,and spreads between different ratings first rose and then descended. To be specific, the yields of high ratingbonds began to go down in middle and late May, while the yields of low-rating MTNs still went up at thistime. Therefore, spreads between different ratings widened. In early June, the market trend began toexpand from high ratings to medium and low ratings, and the decline of low rating bonds gradually exceededthat of high rating bonds, thus greatly narrowing the spread between different ratings. Nevertheless, PBOCdoes not truly change its policy direction, financial de-leverage restrains the size of new funds flowing intocredit bond market, and credit risks of low rating bonds remain to be released. The short-term sustainabilityof market trend is questionable, and there is a pressure that spread between different ratings may widenagain in the future. In terms of performance of bonds with different durations, 3Y bonds > 1Y bonds >5Ybonds, and defensive bonds with medium and short durations enjoyed better performance. 2. Spreadbetween quasi-municipal bonds and industrial bonds stabilized. In June, spread of quasi-municipalbonds fell back, and the spread between quasi-municipal bonds and industrial bonds did not further narrow.
In June, the yields of AAA quasi-municipal MTNs lost 36BP on average, and the yields of AA+ and AA ratingbonds lost 54BP and 69BP on average respectively. Due to a rebound of bond market, the spread betweenindustrial bonds and quasi-municipal bonds did not further narrow. Except that interest spread between lowrating bonds widened slightly, the spread this month was basically flat to market situation at the end of lastmonth. 3. Horizontal comparison among industries. Excavation remained the industry with the highestspread, and real estate industry jumped to second place with respect to high-rating bonds. In June, thespread of MTNs from various industries generally declined. Overcapacity industries like steel, nonferrousmetals and building materials stayed at the top of the list by decline of interest margin, and some industrieswith previously substantial spread growth took fell abruptly in June, such as chemical and commerce &trade.
Monthly market review: Supply increased, trading rose, and yields generally declined. In June, netsupply of major types of credit bond totaled RMB17.8bn, reflecting a great MoM growth. The issuers of AAAbonds ranked first with 36% shares. From the sector perspective, the issuers from manufacturing sectorranked first with 17% share. Among 364 credit bonds of major types issued, there were 124 quasi-municipalbonds, which represented ~34% of all credit bonds and reflected certain MoM growth. In June, trading onsecondary market totaled RMB1.5711tn, indicating a substantial MoM growth. Low rating 3Y bonds postedbetter performance. To be specific, for 1Y bonds, the yield of AA bonds was the biggest loser with a loss of49BP, the yield of AA+ bonds lost 22BP, and the yields of all other ratings lost 6-15BP; for 3Y bonds, theyield of AA bonds lost 66BP, the yield of AA+ bonds lost 50BP, and the yield of AAA bonds lost 34BP; for 5Ybonds, the yield of AA+ bonds lost 41BP, the yield of AAA- bonds lost 37BP, the yield of AA- bonds lost36BP, and the yield of all other ratings lost 33BP; for 7Y bonds, the yield of AA+ bonds lost 24BP, the yield ofAAA- bonds lost 22BP, and the yield of all other ratings lost 17BP.
Monthly rating migration review: The number of credit rating adjustments increased substantially. InMay, a total of 173 corporate rating upgrades of credit bonds were announced, including 138 ratingupgrades and 35 outlook upgrades; entities involved in rating upgrades included 75 urban investmentplatforms. All corporate rating upgrades were mainly attributed to stable corporate operation, enhancedprofitability, reduced debt size and improved debt structure; rating upgrades of urban investment platformswere mainly attributed to reinforced local finance that will provide strong guarantee for debt repayment.
Meanwhile, there were 22 corporate rating downgrades, including 12 rating downgrades and 10 outlookdowngrades; 22 entities involved in those downgrades included 9 urban investment platforms. Amongothers, rating downgrade of Liaoyang City Capital Operation Co., Ltd. was mainly attributed to great declinein revenue and business performance. Corporate rating downgrade of Beipiao Construction Investment Co.,Ltd. was mainly attributed to substantial growth of debt size and an increase in non-operating cash outflow.
Corporate rating downgrade of Xinjiang Qingsong Building Materials and Chemicals (Group) Co., Ltd. wasmainly attributed to excess capacity of cement industry, continued operating loss and large debt size.
Investment strategy: The sustainability of rebound is questionable. Last week, credit bonds rose withthe rise of interest rate bonds. The yield of AAA enterprise bonds lost 8BP on average, the yield of AAenterprise bonds lost 13BP on average, and the yield of quasi-municipal bonds lost 12BP on average. Howwill credit bonds go in the next step? We suggest investors notice the following points:1) Credit event involving Shandong private enterprises occurred again. Last week, Hongye ChemicalGroup Co., Ltd. filed for suspended trading of bonds on the ground of major operational uncertainty, andlater CCXI downgraded Hongye Chemical’s corporate rating from AA to BBB-. Due to the relationship ofmutual guarantee between Shandong Yuhuang Chemical (Group) Co., Ltd. and Hongye Chemical, theprices of bonds issued by the foregoing two companies dropped sharply. As Shandong-based privateenterprises in chemical industry, both Hongye Chemical and Yuhuang Chemical failed to get the financingfrom bond market this year subject to gloomy financing environment. This credit event will further intensifytheir refinancing pressure.
2) The difficulty of local government financing will intensify. Document No.50 and Document No.87stop up financing channels available to local governments like government purchased services andpseudo-PPP conducted through creditor’s investments in the name of equity investments, andaccountability rules on irregular debt financing have a strong deterrent force on local officials and financialinstitutions. The Ministry of Finance will send its personnel to different cities for examination and supervisionon implementation of relevant regulations as from July. The difficulty of local government financing willincrease considerably, and the valuation of existing quasi-municipal bonds will be under pressure.
3) Trend opportunities are hard to get. From middle June on, the sentiment of bond market turned betterand the yields of credit bonds fell considerably to the level in middle April. In fact, trend opportunities ofcredit bonds depend on additional capital. However, banks’ wealth management size continually declined asfrom the beginning of this year, and the growth in June was chiefly attributed to low-leverage, short-durationband operation attempts of trading institutions. In addition, credit bond market will face such challenges asincreased supply, peak period for maturity of entrusted investments in Q3 and rising credit risks in the future.
Therefore, the sustainability of rebound is questionable.
June credit spread monitoring: 1. Credit spread fell back, and spread between different ratings wassqueezed. From late May on, the bond market experienced a long-lost rebound, and credit spread fellconsiderably. This market trend started from high rating bonds before expanding to medium and low ratings,and spreads between different ratings first rose and then descended. To be specific, the yields of high ratingbonds began to go down in middle and late May, while the yields of low-rating MTNs still went up at thistime. Therefore, spreads between different ratings widened. In early June, the market trend began toexpand from high ratings to medium and low ratings, and the decline of low rating bonds gradually exceededthat of high rating bonds, thus greatly narrowing the spread between different ratings. Nevertheless, PBOCdoes not truly change its policy direction, financial de-leverage restrains the size of new funds flowing intocredit bond market, and credit risks of low rating bonds remain to be released. The short-term sustainabilityof market trend is questionable, and there is a pressure that spread between different ratings may widenagain in the future. In terms of performance of bonds with different durations, 3Y bonds > 1Y bonds >5Ybonds, and defensive bonds with medium and short durations enjoyed better performance. 2. Spreadbetween quasi-municipal bonds and industrial bonds stabilized. In June, spread of quasi-municipalbonds fell back, and the spread between quasi-municipal bonds and industrial bonds did not further narrow.
In June, the yields of AAA quasi-municipal MTNs lost 36BP on average, and the yields of AA+ and AA ratingbonds lost 54BP and 69BP on average respectively. Due to a rebound of bond market, the spread betweenindustrial bonds and quasi-municipal bonds did not further narrow. Except that interest spread between lowrating bonds widened slightly, the spread this month was basically flat to market situation at the end of lastmonth. 3. Horizontal comparison among industries. Excavation remained the industry with the highestspread, and real estate industry jumped to second place with respect to high-rating bonds. In June, thespread of MTNs from various industries generally declined. Overcapacity industries like steel, nonferrousmetals and building materials stayed at the top of the list by decline of interest margin, and some industrieswith previously substantial spread growth took fell abruptly in June, such as chemical and commerce &trade.
Monthly market review: Supply increased, trading rose, and yields generally declined. In June, netsupply of major types of credit bond totaled RMB17.8bn, reflecting a great MoM growth. The issuers of AAAbonds ranked first with 36% shares. From the sector perspective, the issuers from manufacturing sectorranked first with 17% share. Among 364 credit bonds of major types issued, there were 124 quasi-municipalbonds, which represented ~34% of all credit bonds and reflected certain MoM growth. In June, trading onsecondary market totaled RMB1.5711tn, indicating a substantial MoM growth. Low rating 3Y bonds postedbetter performance. To be specific, for 1Y bonds, the yield of AA bonds was the biggest loser with a loss of49BP, the yield of AA+ bonds lost 22BP, and the yields of all other ratings lost 6-15BP; for 3Y bonds, theyield of AA bonds lost 66BP, the yield of AA+ bonds lost 50BP, and the yield of AAA bonds lost 34BP; for 5Ybonds, the yield of AA+ bonds lost 41BP, the yield of AAA- bonds lost 37BP, the yield of AA- bonds lost36BP, and the yield of all other ratings lost 33BP; for 7Y bonds, the yield of AA+ bonds lost 24BP, the yield ofAAA- bonds lost 22BP, and the yield of all other ratings lost 17BP.
Monthly rating migration review: The number of credit rating adjustments increased substantially. InMay, a total of 173 corporate rating upgrades of credit bonds were announced, including 138 ratingupgrades and 35 outlook upgrades; entities involved in rating upgrades included 75 urban investmentplatforms. All corporate rating upgrades were mainly attributed to stable corporate operation, enhancedprofitability, reduced debt size and improved debt structure; rating upgrades of urban investment platformswere mainly attributed to reinforced local finance that will provide strong guarantee for debt repayment.
Meanwhile, there were 22 corporate rating downgrades, including 12 rating downgrades and 10 outlookdowngrades; 22 entities involved in those downgrades included 9 urban investment platforms. Amongothers, rating downgrade of Liaoyang City Capital Operation Co., Ltd. was mainly attributed to great declinein revenue and business performance. Corporate rating downgrade of Beipiao Construction Investment Co.,Ltd. was mainly attributed to substantial growth of debt size and an increase in non-operating cash outflow.
Corporate rating downgrade of Xinjiang Qingsong Building Materials and Chemicals (Group) Co., Ltd. wasmainly attributed to excess capacity of cement industry, continued operating loss and large debt size.
Investment strategy: The sustainability of rebound is questionable. Last week, credit bonds rose withthe rise of interest rate bonds. The yield of AAA enterprise bonds lost 8BP on average, the yield of AAenterprise bonds lost 13BP on average, and the yield of quasi-municipal bonds lost 12BP on average. Howwill credit bonds go in the next step? We suggest investors notice the following points:1) Credit event involving Shandong private enterprises occurred again. Last week, Hongye ChemicalGroup Co., Ltd. filed for suspended trading of bonds on the ground of major operational uncertainty, andlater CCXI downgraded Hongye Chemical’s corporate rating from AA to BBB-. Due to the relationship ofmutual guarantee between Shandong Yuhuang Chemical (Group) Co., Ltd. and Hongye Chemical, theprices of bonds issued by the foregoing two companies dropped sharply. As Shandong-based privateenterprises in chemical industry, both Hongye Chemical and Yuhuang Chemical failed to get the financingfrom bond market this year subject to gloomy financing environment. This credit event will further intensifytheir refinancing pressure.
2) The difficulty of local government financing will intensify. Document No.50 and Document No.87stop up financing channels available to local governments like government purchased services andpseudo-PPP conducted through creditor’s investments in the name of equity investments, andaccountability rules on irregular debt financing have a strong deterrent force on local officials and financialinstitutions. The Ministry of Finance will send its personnel to different cities for examination and supervisionon implementation of relevant regulations as from July. The difficulty of local government financing willincrease considerably, and the valuation of existing quasi-municipal bonds will be under pressure.
3) Trend opportunities are hard to get. From middle June on, the sentiment of bond market turned betterand the yields of credit bonds fell considerably to the level in middle April. In fact, trend opportunities ofcredit bonds depend on additional capital. However, banks’ wealth management size continually declined asfrom the beginning of this year, and the growth in June was chiefly attributed to low-leverage, short-durationband operation attempts of trading institutions. In addition, credit bond market will face such challenges asincreased supply, peak period for maturity of entrusted investments in Q3 and rising credit risks in the future.
Therefore, the sustainability of rebound is questionable.
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