Debt of mining companies in China’s leading coal province has ballooned to about the same level as its annual economic output, casting doubt over the ability of the regional authority to backstop their new bonds.
The Shanxi government plans to guarantee note sales from seven coal producers owned by the northern province, people familiar with the matter said earlier this month. Total debt of those firms climbed to 1.2 trillion yuan ($184 billion) at the end of 2015, just 100 billion yuan less than the province’s gross domestic product that year, according to a May 5 report from Citic Securities Co. Shanxi Jincheng Anthracite Mining Group Co., one of the seven firms, had to offer investors nearly double the yield of similarly-rated notes when it sold AAA rated five-year bonds at the end of last month.
“Investors are avoiding coal companies right now so it will get harder for them to issue new debt,” said Li Ning, the general manager of the fixed-income department at Western Securities Co. in Beijing. “Plus the Shanxi government supporting the region’s coal companies is financially weak.”
Coal miners in Shanxi, part of what’s known as China’s rust belt, have struggled as the nation’s worst economic slowdown in a quarter century batters demand and Premier Li Keqiang vows to cut excess capacity in industries including coal. Output of the mineral in Shanxi tumbled 10 percent last year from its peak of 976.7 million tons in 2014, according to Bloomberg Intelligence data. Chinese coal companies need to repay 268 billion yuan of bonds coming due by the end of this year, Bloomberg-compiled data show.
State-backed Chinacoal Group Shanxi Huayu Energy Co., based in Shanxi province, became the latest coal company to default on a repayment of onshore notes last month.
The fact that the provincial government needs to guarantee debt shows it itself that the coal companies suffer from bad operating conditions and high refinancing risk, Hua Chuang Securities Co. analyst Ji Linghao wrote in a May 5 report.
The province’s public budget revenue last quarter dropped 12.8 percent from the same period last year to 43.6 billion yuan while its economic growth was the second slowest among all provinces in the nation.
Companies in the sector have had to cancel bond offerings recently, making it more difficult to refinance, according to Citic Securities. Shanxi Jincheng Anthracite abandoned sales of short-term commercial paper twice last month. It sold 1 billion yuan of five-year AAA rated notes at the end of April at a yield of 6.8 percent, compared with the average 3.6 percent yield on similar-rated notes.
The firm has a 6.6 percent probability it will miss payments in the next 12 months, more than double the industry average of 2.5 percent, according to the Bloomberg Default Risk model that tracks metrics including share performance, liabilities and cash flow.
An official at the media department of Shanxi Jincheng Anthracite Mining Group said the company can’t comment without approval of Shanxi’s foreign affairs office. The office didn’t respond to an e-mail seeking comment. Shanxi’s State-owned Assets Supervision & Administration Commission didn’t reply to a fax seeking comment.
Yangquan Coal Industry Group Co., also one of the seven state-owned coal firms in Shanxi, scrapped a medium-term note sale of 1.5 billion yuan last month citing market volatility , according to an April 8 company filing. Lu’An Group, another of the seven, sold five-year notes at 6.8 percent, the top end of the guidance, said two people familiar with the offering Wednesday, who were not authorized to speak publicly and asked not to be identified.
While coal prices have been rebounding recently, it will take time for the rally to improve coal company finances and investors are still worried about their repayment ability, said Sun Binbin, an analyst at China Merchants Securities Co.
“Overcapacity sectors, such as coal companies, rely mainly on short-term funding because investors wouldn’t want to hold their long-tenor debt,” said Yang Hao, a fixed-income analyst at Nanjing Securities Co. “The short-term nature adds uncertainty.”