Companies ride the bull market to lower debt with share placements
Cheaper and faster than bank loans, HK and mainland listed firms take advantage of bull market to undertake share placements to lower debt
Companies are taking advantage of the bull market in Hong Kong and the mainland to undertake share placements to lower their debt, a trend supported by Beijing after mainland corporate debt has soared to risky levels.
"This is a good time to do placement given the high valuations. The market has risen rapidly. A lot of the money will be to repay debt," said Francis Cheung, CLSA's managing director of China-Hong Kong strategy.
The Hang Seng Index has surged 14 per cent since mid-March, while the Shanghai Composite Index has doubled since October and the Shenzhen Composite Index has tripled in the past 12 months.
The bull run would boost the valuation of a listed company, which would enable it to raise more funds in a placement, said Alvin Cheung Chi-wai, associate director at Prudential Brokerage.
"The cost of share placements will be less compared to bank loans," he said. "Sometimes, a placement can be completed overnight in a bull run, but it may take a month for banks to come up with a loan of the same amount."
Johnson Chui, head of Hong Kong and China equity capital markets at Credit Suisse, said: "We have recently seen a heightened level of placement activity for Hong Kong-listed companies on the back of a supportive market environment and investor sentiment. Both issuers and vendors are eager to capture the market window in raising primary and secondary capital when it is still conducive."
Credit Suisse and Morgan Stanley were the placing agents of a HK$12.11 billion placement by Ali Pictures Group, announced by the Hong Kong-listed firm yesterday.
In May, the total value of placements on the Hong Kong stock market jumped 425 per cent year on year to US$14.55 billion, while placements on the Shanghai stock market soared 442 per cent to US$12.34 billion and those in the Shenzhen stock market skyrocketed 465 per cent to US$2.88 billion, according to Dealogic. It said the biggest share placement by a Chinese company this year was a 29.8 billion yuan (HK$37.7 billion) placement in Shanghai by Inner Mongolia Baotou Steel Union, which the state-owned firm announced on May 28.
The amount of funds involved in share placements should not put downward pressure on the stock market, given the daily turnover of the Hong Kong stock market was more than HK$100 billion, said Sam Chi-yung, a strategist at Delta Asia Financial. "Since there is ample liquidity, it should be digested by the market," he said.
While some of the funds raised will be used for investment, some will also be used to reduce debt. For example, China Railway Construction Corporation (CRCC) announced on Wednesday that it would raise 9.94 billion yuan from an A-share placement, of which 2.84 billion yuan would be used to repay bank loans and replenish working capital, while 7.1 billion yuan would be devoted to infrastructure projects. CRCC, listed in Shanghai and Hong Kong, is one of China's two dominant state-owned rail construction firms.
CLSA's Cheung said the central government wanted to use the bull market to reduce corporate debt because that would reduce risk. "Debt levels will reduce growth," he said.
A Bank of America Merrill Lynch (BOAML) report estimated the mainland's high corporate debt had incurred an interest burden of at least US$625 billion, which would eat into GDP growth.
The mainland's corporate debt nearly tripled to US$12.5 trillion in the second quarter of last year from US$3.4 trillion in 2007, and the corporate debt to GDP ratio was the highest in the world, it said.
BNP Paribas estimated the mainland's corporate debt to GDP ratio had surged to 149 per cent last year from 99 per cent in 2007.
BOAML said: "China's objective is to raise the ratio of equity market capitalisation, currently US$9.1 trillion, to loans, currently US$20.7 trillion outstanding, and have Chinese households and foreigners help with this process."
The vast majority of investors in mainland stocks are retail investors.
"Asian debt rose from US$8.1 trillion in 2005 to US$32 trillion in 2014, with an exponential rise after the global financial crisis," BNP Paribas said in a report. "China has seen the most egregious rise, with corporate and household debt quadrupling since 2007."
The real estate sector in Hong Kong and the mainland was at risk from possible US dollar appreciation, BNP Paribas warned.
