The reliance on state bail outs is coming to an end in
China. The excuses are many fold from "utilising
this time to improve quality, lower pollution, improve economics." It’s
our view China has to stop investing such a large percentage of GDP into
capital investments; whether that be roads, railways or redeveloping towns.
The weighting of lenders towards specific sectors is not the
only issue specifically where there has been the most defaults: Solar, Coal,
Real Estate and potentially Steel Mills (two are rumoured to be looking for
aid). There are number of bonds due this year in China, with the market
exceeding the official figures.
The Chinese bond market should be a likened to the larger
platinum producers raising capital for expansion, but unsurprisingly this has
to be transferred to OPEX - a prime example being Aquarius Platinum and Lonmin.
What parties should be concerned with is the "amount of cash raised compared
to what is available to pay these coupons." In such a short-period of time
the cash has all but disappeared.
The most recent Baoding Tianwei Electric
default is a prime example. With $328 million raised 2-3 ish years ago and
it barely has enough cash to make a $500K part payment that was due
on the 7th March 2014.
Chinese Bonds replaced the Development Grants that the Chinese
awarded to the likes of the Solar, Coal and Steel Mills for stimulus. The
investors mistook these grants for a bottom line operational profit, but
someone forgot to ask how much development grant has the company had and how
much less will it be receiving.
If major companies are defaulting on repayments within 2 to
3 years of the issue of Bonds, it raises a significant question about how bad
the balance in the economy is or is not. The latter has caused the deleveraging
of positions in the Copper and Iron Ore, with consequences being felt in the
product pricing such as steel with oversupply as an additional problem.
Ironically, if one is to look at the Rusal IPO and listing
in Hong Kong, the figures rather glaringly stated what was going on not only in
China but Russia. The Russian state bank is alleged to be looking at bailing
Rusal out. From one perspective, bailing out international lenders at this time
with the Crimean issues is very unlikely. "Lenders" are likely to
compromise on a deals albeit at the last minute.
The property bonds, are not only pricing risk in on Copper,
but also on the entire over-cooked/leveraged sector. With Zhejiang Xingrun
Properties clearly unable to pay its $500+M bond's what next?
Well my view is simple, in order to meet growth targets
etc...China ironically has to let these defaults occur to avoid further
over-cooking in other sectors.
First China had Coal Defaults (albeit bailed out), then
Solar defaults, then Buildings and/or Real Estate. Its only time before these
positions unwind so must the leverage in Copper, Steel (the most heavily
leveraged one way steam locomotive that's running out of track!), Iron
ore, and Oil. This will be a short-term correction but more pronounced.
With Iron ore likely to be 61-65 a tonne 12-18 month
average and that is slightly higher than our revised consensus of 55-57$. I
acknowledge it’s bounced a little, but I put that down to speculators doing the
same as I and buying back their short positions.
The knock on is that aim market will suffer with economies
of scale not being to a magnitude to become more efficient. The prime example
being the Gulf Keystone, which was it really a surprise?
Some idiots, had a belief that two Chinese chaps in the
Gallery at the trial meant a buyout. Correct me if I am wrong but the best time
to sell Gulf keystone was when they raised the bonds Pricingof Convertible Bonds but more importantly when one of the head honchos
sold ten million.
Its acknowledged that it was a transfer under a financing
agreement but let’s face it, it’s still a corporate activity between two
parties (aka a sell). Namely, that corporate activity involved a person whom
was meant to be enhancing shareholder value but strangely was not maintaining
any exposure.
As a thought, with the Bonds under significant stress,
higher cash burn, and limited production, what's the odds of it going forward?
But strangely, why has the market been so slow to react and will GKP be able to
raise monies at a level that is affordable for the development. It’s looking
more likely that a stressed farm in deal or massively discounted Rights Issue
will occur perhaps a SEDA just to cheer the holders up some more.
Genel are funded, have cash and are certainly a cheaper
option in terms of director salaries than say, GKP. However, any deal would
have been done long ago, and with the risks GKP have, any suitor would surely
be wise to wait to see how poorly the company is before approaching.
Interesting times, but its worth consideration with a spat
of corporate bonds being inked over recent months, will there be defaults?
Hmmm, these 5-6% high returns in a bond are not really worth the risks of
companies whom have not got the prowess nor history to back up their assertions
off repayment.
GKP have not defaulted, but it will certainly have some
stress and or costs attached to make payment. I would not be surprised if
equity was exchanged for the repayment at a discount to market for parties to
load them off to cover their own liabilities.
It’s nice to see blogger comments working properly, I'm
aware it’s been a non-goer for some time. I can read them merely not publish
most of them despite trying. Even those negative ones, extolling positives
about my character and shorting actions (I think everyone knows there haven't
been any of those!).
Perhaps shorters should be called realisers of true value,
it sounds more acceptable. This is from someone that disagreed with the
shorting principles of negative betting only 4-5 short years ago. It was a
realisation that people were more likely to back a dog and hold it tighter, that
I realised shorting was easier to start, realise and assess companies than
longing.
There are benefits though, trading is more exciting, and
shorters have a mind-set that is ironically positive, don't moan about taking a
hit, but most importantly of all have to make their own decisions.
I would go as far to say it’s addictive, what better
validation than making money when the majority think the price will appreciate?
The underdog of the market, the contender for the most abuse.
As a final thought for those thinking about all things
trading wise, I will not be sharing my data, but what percentage of AIM
companies have missed their self-reported targets? Doesn't bode well for the
longs out there if there's so few companies where targets are being met.
Just a thought...
All the best, Fraser (Sat outside in the UK in March without
thermals)
