Business
First China Default Seen as Record $427 Billion Debt Due
BEIJING – Chinese company debt twice the size of Ireland’s economy will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default.
A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since China International Capital Corp. began compiling the data in 2008. Ten-year AAA corporate bond yields surged 89 basis points since Dec. 31 to 6.18 percent, touching a record 6.23 percent on Nov. 27. That compares with a 70 basis-point rise to 2.68 percent for similar-rated notes globally.
People’s Bank of China Governor Zhou Xiaochuan’s signal the central bank will act to prevent excessive leverage has contributed to the surge in borrowing costs and forced many firms to delay financing plans. Rising interest rates may cause a “partial debt crisis to explode,” the official China Securities Journal said in a Nov. 26 editorial.
“The probability of default will get much higher in 2014 as maturing debt reaches a record,” said Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “The central bank’s policy of controlling leverage, which may last a long time, will crowd out companies with bad credit profiles and, ultimately, help restructure the economy.”
Sales Pulled
Bond sales by Chinese companies are down 23 percent to 1.57 trillion yuan this half-to-date compared with the first six months of the year, according to data compiled by Bloomberg. Companies postponed or scrapped 96.1 billion yuan of bonds in November compared with 29.8 billion yuan the month prior, according to filings on the websites of Chinamoney, Chinabond and Shanghai Clearing House.
The 2.6 trillion yuan of debt due next year consists of a record 2.13 trillion yuan of notes which must be redeemed, and a record 470 billion yuan in interest, the CICC data show. Investors also have options to sell some 200 billion yuan of bonds back to issuers, according to CICC.
Prominent Problems
There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service. Guosen Securities Co. estimates Chinese non-financial companies’ debt ratios reached 93 percent last year, while the average in Asia hasn’t surpassed 70 percent in the last 10 years, according to a report released on Dec. 2.
The central bank warned on Nov. 5 the economy may see a decline in leverage over a long period, and said there are “prominent” problems in local government and property industry borrowings. China’s broad debt ratio has also been rising sharply, PBOC Deputy Governor Hu Xiaolian said on Nov. 20.
Following the Communist Party’s Nov. 9-12 plenum, China’s leaders pledged to allow market forces a “decisive” role in the allocation of resources. Societe Generale SA China economist Yao Wei said the announcement signals the government may stop saving troubled companies which can’t meet debt obligations and allow the first bond default in the coming 12 months.
‘Doomed Companies’
“If the government is going to let market forces play an important role, it should let those doomed companies fail,” said Yao in Hong Kong. “In industries with overcapacity, such as steel and shipbuilding, there’s a higher likelihood of bond defaults.”
Credit risks are most concentrated in highly leveraged sectors, including heavy industries, according to Ping An’s Shi, who said rising borrowing costs will begin to have a “real effect” on the world’s second-largest economy next year. Corporate bond yields may rise to even higher levels in the first half of 2014, he said.
Xinyu Iron & Steel Co. (600782), a Jiangxi-based steelmaker which reported a loss of 175 million yuan for the January to September period, has 3.25 billion yuan of borrowings due in 2014, compared with 0.31 billion yuan in 2013, according to data compiled by Bloomberg. The yield on the company’s AA+ locally rated 2016 debt has almost doubled this year to 10.5 percent as of Dec. 6, according to exchange data.
The yield on five-year AA rated corporate bonds has risen 125 basis points this year to 7.26 percent, according to Chinabond. The rate on similar-maturity government debt climbed 116 basis points to 4.39 percent. The gap widened 8 basis points to 287.
Debt Burdens
“Companies are facing heavy debt burdens and cash supply is tight. All these factors will make bond defaults very likely,” said Dong Hui, a bond analyst at China Securities Co. in Beijing. “But it’s hard to judge whether the first will happen next year. After all, no local governments want companies in their localities to be the first to default.”
Electricity companies have to repay 520 billion yuan in bond principal and interest next year, the most among all industries, according to CICC, which took out third place for fixed-income research in New Fortune magazine this year. That’s followed by local government financing vehicles, which must repay 239 billion yuan.
As default concerns escalate, the cost of insuring the nation’s debt against non-payment is edging higher. China’s credit-default swaps increased 2.1 basis points last week to 67.5 as of Dec. 6, according to data provider CMA. The swaps rose 1.4 basis points the week prior, advancing for the first time since the five days ended Oct. 25, the data show.
Cash Supply
The yuan advanced to the strongest level in 20 years today after the central bank raised the currency’s daily fixing to a record and the nation’s trade surplus widened to the biggest in more than four years. It rose 0.15 percent to 6.0726 per dollar as of 10:04 a.m. in Shanghai, China Foreign Exchange Trade System prices show.
Guotai Junan Securities Co. Shanghai-based bond analyst Li Qing said China’s slowing economy will also increase default probabilities next year. Guotai Junan, the nation’s third-biggest brokerage, forecast economic growth will slow to 7.3 percent next year, from 7.6 percent in 2013.
“Cash supply will probably remain tight and the economy may decelerate from the second quarter of next year,” said Li. The premium on bonds rated AA or lower may widen further, she said.
SocGen’s Yao said some companies averted defaults in 2012 because local governments stepped in to help. CHTC Helon Co., the fiber maker which used to be called Shandong Helon Co. (000677) and became the first company to lose its investment-grade rating in December 2011, repaid 400 million yuan of bonds in April 2012 even as it failed to make loan repayments.
“Whether there’ll be a bond default or not is mostly a political decision,” said Yao. “Huge maturing debt and cash shortages provide conditions for the first default to happen. But whether it will depends on the leadership’s willingness to make the right choices.”
– BLOOMBERG
The need for stronger regional collaboration, government-private sector synergy, and innovative market solutions to unlock Africa’s economic potential has been brought to the fore.
Group CEO of the Nigerian Exchange Group Plc (NGX Group), Temi Popoola, shed light on the transformative potential of Africa’s capital markets at the launch of the Ethiopian Securities Exchange (ESX).
The NGX Group’s strategic investment in ESX underscores its leadership in advancing Africa’s capital market infrastructure. “The launch of ESX represents a pivotal moment for Ethiopia and the broader African financial landscape,” Popoola stated. “ESX will serve as a crucial mechanism for capital formation and market liquidity, driving sustainable economic growth.”
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Expounding on NGX Group’s investment rationale, Popoola highlighted Ethiopia’s immense market potential and the shared vision of fostering economic growth through innovation. “Our partnership transcends traditional investment parameters,” he explained. “It is about ensuring that ESX evolves into a key player in Africa’s financial ecosystem, enabling cross-border investments and setting benchmarks for market development.”
Popoola also drew parallels with global success stories like India, which has leveraged its capital markets to achieve significant economic transformation. He emphasized the importance of responsible market opening to attract local and continental capital. “By following this path, Ethiopia can become a financial hub in Africa,” he remarked.
Prime Minister Abiy Ahmed lauded the launch of ESX as a transformative milestone in the country’s journey toward economic modernization. “Today, we have officially rung the bell to launch the Ethiopian Securities Exchange, our nation’s first stock exchange,” the Prime Minister announced on X. “This is a call to global investors: Ethiopia offers immense potential, a fast-growing economy, and a clear trajectory toward shared prosperity.”
CEO of the Ethiopian Securities Exchange, Tilahun Esmael Kassahun, expressed confidence in the partnership with NGX Group. “We are pleased to welcome NGX Group as a strategic partner, building upon the existing support we continue to receive from them,” he said. Kassahun also emphasized the value of NGX Group’s expertise in shaping ESX’s growth and success.
Drawing from NGX Group’s six decades of experience, Popoola shared insights on diversifying financial instruments and expanding access to investment opportunities. “With the right mix of innovation, policy support, and regional collaboration, Ethiopia’s capital market can play a transformative role in driving economic development and establish itself as a leader in Africa’s financial ecosystem,” he concluded.
With the ESX poised to redefine Ethiopia’s financial landscape, NGX Group’s involvement highlights the critical role of partnerships and shared expertise in advancing Africa’s economic narrative.
The Office of the Auditor-General of the Federation has uncovered financial irregularities amounting to ₦514 billion in the 2021 operations of the Nigerian National Petroleum Company Limited (NNPC Ltd).
The revelations were contained in a comprehensive audit report highlighting non-compliance and internal control weaknesses within Ministries, Departments, and Agencies (MDAs) during the 2021 financial year.
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Breakdown of Infractions
The audit detailed four major financial discrepancies within NNPCL:
“Irregular Deductions: A total of ₦343.64 billion was deducted from domestic crude oil sales at source without proper documentation.
“Sinking Fund Deposits: ₦83.66 billion, categorized as miscellaneous income, was retained in a sinking fund account.
“Unauthorised Refinery Deductions: ₦82.95 billion was deducted from federation revenue purportedly for refinery rehabilitation.
“Unsubstantiated Payments: ₦3.75 billion was flagged for transactions related to petrol sales that lacked proper verification.
The Auditor-General’s report stated that these financial activities violated the 1999 Constitution and the Financial Regulations Act of 2009, underscoring significant lapses in compliance with statutory guidelines.
According to the report, NNPCL generated ₦484.73 billion from domestic crude oil sales in March and May 2021.
However, ₦343.64 billion was deducted for various purposes, including “Value Shortfall,” “Strategic Stock Holding Cost,” and “Pipeline Maintenance.”
The deductions were made unilaterally by NNPCL without adequate documentation or justification.
Additionally, the report flagged ₦50 billion of the net payable amount for May 2021 as unaccounted for, creating a significant gap in the federation’s revenue.
“Audit observed from the review of NNPC SAP payment record for March and May 2021 payments that the sum of ₦484.73bn was the gross amount generated for the sale of domestic crude for the months of March and May 2021.
“The sum of ₦343.64bn from the gross amount was unilaterally deducted from the gross domestic crude sales as NNPC Value shortfall, Strategic Stock Holding Cost, Crude Oil and Products Pipeline Losses, as well as the pipelines maintenance and management costs.
“The details of each of the cost components deducted were not provided for audit review. Hence, the reasons for the deductions could not be justified by the management.”
On the unremitted ₦50 billion from May 2021, the report noted: “In the month of May, the net payable that could have been remitted ought to have been ₦127.075bn, but only the sum of ₦77.075bn was remitted, leaving an unremitted balance of N50bn to the Federation Account, which has remained unaccounted for.”
The report attributed these anomalies to weaknesses in NNPCL’s internal control systems, warning of the risks they pose to public funds.
It read, “The above anomalies could be attributed to weaknesses in the internal control system at NNPC, now NNPC Ltd. This is a potential loss of Federation revenue, diversion of public funds, or misapplication or misappropriation of funds.”
The success of the maiden edition of the Lagos Shopping Festival (LSF), Africa’s first 72-hour non-stop commerce and entertainment event has been credited to the Governor of Lagos State, Babajide Sanwo-Olu.
This is the view of Managing Director/Chief Strategist of Chain Reactions Africa Ltd, Israel Jaiye Opayemi, one of the main organisers of the event.
According to Opayemi, though Chain Reactions Africa conceptualised the event, the festival could be rightly described as the Governor’s baby and owes its success to his leadership. “Firstly, the Lagos Shopping Festival could not have come to fruition if the Governor did not buy into our audacious plan when we first presented the idea to him during the Covid-19 pandemic in 2020. Secondly, it was the Governor’s exemplary leadership of the project as its Chief Marketing Officer which attracted the buy-in of key sponsors like Zenith Bank, Tolaram Group, First Bank Plc, and Guinness Nigeria Plc,” Opayemi revealed.
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While the duo of Zenith Bank and First Bank provided their bank on wheel platforms for buyers at the Lagos Shopping Festival, they also supported the Vendors with special Point of Sale Machines with which to process payments from buyers. The banks were also seen marketing their diverse banking products to guests within the shopping arena.
For Tolaram, it was a time to support the citizens and give back to society. Guests at the Lagos Shopping Festival were freely given some of the products of the group such as PowerOil, Indomie and Kellogg’s packaged into goodie bags and given out to prospective buyers at the shopping arena. The Children’s Arena was however activated by Indomie with the children entertained by Santa Claus within a well-equipped arena manned by the Indomie Brands team and the Lagos State Safety Marshalls. The children were daily treated to free Indomie meals daily and given various gifts to go home with.
On its part, Guinness Nigeria came through as the real life of the Nigerian party by organizing product sampling activation for the teeming guests at the festival using brands such as Singleton, Johnnie Walker, Ciroc, Don Royale and Captain Morgan to deliver pleasant experiences to guests aside from Guinness and Malta Guinness.
While unveiling the identity of the festival last month, Governor Babajide Sanwo-Olu had thanked the management of Zenith Bank Plc, Tolaram Africa Group, Guinness Nigeria Plc and First Bank of Nigeria for supporting the idea of a Lagos Shopping Festival, describing it as a value addition on the state’s tourism calendar and the overall efforts to grow the State’s GDP. The Governor further said, “I must specially acknowledge your pioneering sponsorship role. It is easy for a corporate sponsor to jump on the sponsorship band wagon of an already established festival and fund it. But you are supporting the maiden edition of this Lagos Shopping Festival with us. The competition is watching you now. Do not build this brand with us and yield the space for the competition to take over. I do hope you would all commit long term to this brilliant initiative.”
On his part, Girish Sharma, CEO Guinness Nigeria Plc, expressed enthusiasm for the initiative. “Lagos is the commercial heartbeat of Nigeria and Africa’s entertainment capital, and the Lagos Shopping Festival captures its essence. We see opportunities in this initiative because it is a creative fusion of commerce and entertainment. This partnership reflects our dedication to fostering economic opportunities and support the nation’s vibrant entertainment industry.”
A first-of-its-kind, the festival was a convergence of commerce and entertainment, bringing together buyers and sellers in the MSME ecosystem, and hordes of fun-seekers who were entertained with thrilling performances by A-list entertainers, including Adekunle Gold, Wande Coal, Teni, Young Jonn, BNXN, Ayo Maff, SB Live and EmmaOMG. The list also included some of Nigeria’s most sought after DJs such as DJ Neptune, DJ YK Mule, DJ Baddo while Gbenga Adeyinka the 1st and Larry J dished out rib-cracking comedy performances.
Held from 23rd to 25th Day of December 2024, at the iconic Mobolaji Johnson Arena, Onikan Stadium, Lagos, the Lagos Shopping Festival saw thousands of fans throng the main venue and select Lagos malls during the three-day period to bag the latest bargains from local and top global brands.
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