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Private placement curbs set to raise corporate China's debt risks

By Engen Tham and Michelle Price

By Engen Tham and Michelle Price

SHANGHAI/HONG KONG (Reuters) - New rules to rein in a surge in private share sales by Chinese companies are pushing more cash-strapped firms to borrow instead, bankers and analysts say, adding to a corporate debt burden already at its highest since the global financial crisis.

Private placements in China jumped fivefold from 2013 to $172 billion in 2016, skirting regulators' controls on IPOs and raising concerns that companies were raising too much money for inefficient or speculative purposes.

That prompted new rules from the China Securities Regulatory Commission (CSRC) last month limiting the size of such fundraisings, regulating timing, and excluding some sectors altogether.

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According to local media reports, 46 companies have canceled private placements since the rules came in, and Haitong Securities expects a drop of 20 to 30 percent in 2017.

That could please some investors who say private placements are often opaque and can be used to inflate share valuations, but it could also cut off a lifeline to struggling companies.

Bankers and analysts say such firms are now considering options such as preferred shares, convertible bonds and bank loans.

Chinese Premier Li Keqiang told China's annual parliament session this month that tackling the debt burden was a priority this year, but such options would increase corporate indebtedness, which has soared to 169 percent of gross domestic product (GDP), according to the Bank for International Settlements.

UBS analysts say an increasing share of new credit is being used to service existing debt.

"Deleveraging will not happen as quickly as originally planned," said Kai Hu, senior vice president at rating agency Moody’s, predicting difficulties ahead for some borrowers.

PLANS PARKED

Real estate firm Hubei Fuxing Science and Technology <000926.SZ> had planned to raise 3.3 billion yuan ($480 million) in a private placement to develop its business, according to a filing on the Shenzhen stock exchange in January.

It tore up those plans the following month after the CSRC unveiled the new rules to limit 'excessive' fundraising.

Instead, Hubei Fuxing extended a $400 million loan from Minsheng Bank that would have ended on March 7 and got approval from shareholders to issue up to 1.29 billion yuan of debt financing instruments - despite a debt burden already at 185 percent of equity at end-September. The industry median was around 80 percent, according to Reuters data.

Hubei Fuxing was not immediately available for comment.

Si Chuan Jinyu Automobile City Group <000803.SZ> also dropped a planned 830 million yuan private placement in February, citing the new rules. It has since said the issue is under negotiation and on Tuesday said it was seeking a loan from a bank or other lender, though it denies that was because of the cancellation.

The firm already has a debt-to-equity ratio of more than 400 percent.

High debt levels could limit companies' ability to fund development and put them at greater risk if they encounter business headwinds, said Jiahe Chen, chief economist at Cinda Securities.

The CSRC has been tightening access to private placements since the end of last year, responding to fears that listed companies were raising too much money for poor or speculative investments including high-yielding wealth management products.

The new rules limit placements to not more than 20 percent of a firm's share base and prohibit them within 18 months of a previous fundraising by the firm.

In the 98 instances where companies have issued private placements since the beginning of 2014, around 10 percent raised more than 20 percent of share capital, Reuters calculations show.

The timing restriction could affect still more, with around 50 percent of those recent cases occurring within 18 months of a previous refinancing.

Such restrictions are also bad news for banks relying on fees from company share placements.

"You could do a lot in one year, which meant easy money," said a banker at an international investment bank in Beijing.

A rise in initial public offerings or secondary sales is unlikely to cover the drop in earnings, since the time required for a major listing could stretch to two or three years.

(Click here for a graphic on 'Private placements in China' http://fingfx.thomsonreuters.com/gfx/rngs/CHINA-STOCK-PRIVATE%20PLACEMENT/010031VX48D/china-private-placement.jpg)

(Reporting by Engen Tham and Michelle Price; Additional reporting by Umesh Desai; Editing by Clara Ferreira Marques and Will Waterman)