China Billionaire’s Steel Bond Fall Flags Industry Smog Woes

China Billionaire’s Steel Bond Fall Flags Industry Smog Woes

Bonds of Nanjing Iron & Steel Co. (600282), partly owned by Chinese billionaire Guo Guangchang, are set for their worst month on record as concern mounts the government’s campaign to reduce smog and overcapacity may exacerbate losses.The yield on the mill’s 2018 notes rated AA+ soared 303 basis points since Dec. 31 to 11.67 percent, on track for the sharpest jump since the securities were issued in May 2011, according to exchange data. That compares with the 6.99 percent average yield on similar-maturity corporate notes in China with the same credit grade. Guo, China’s 13th richest man with a net worth of $4.6 billion, controls Nanjing Steel as chairman of the conglomerate Fosun International Ltd. (656)

Nanjing Steel, which lost 561.3 million yuan ($92.7 million) in 2012, faces possible delisting of its 2018 bonds should it post a second straight loss for last year, according to Shanghai stock exchange rules. Notes by other makers of the metal including Anyang Iron & Steel Inc. (600569) and Xinyu Iron & Steel Co. have also tumbled as authorities this month told provinces and municipalities to cut air pollutants by as much as 25 percent.

“Investors are worried the steel industry may underperform because of the fight against air pollution and the curb on overcapacity,” said Chen Ying, a bond analyst at Sealand Securities Co. in Shenzhen. “They’re also concerned Nanjing Steel may report a second year of losses for 2013.”

An official in Nanjing Steel’s department which handles investor relations, who asked not to be identified citing company policy, said the metal maker won’t have any problem repaying the bond’s principal and interest, judging from current manufacturing and operating conditions.

Yields Rise

The yield on Anyang Iron & Steel’s 2019 bonds has jumped 300 basis points this month to a record 14.75 percent, according to exchange data. The rate on Xinyu Iron & Steel Co.’s 2016 debentures climbed 149 basis points to an unprecedented 12.25 percent, the data show.

President Xi Jinping has pledged to tackle pollution amid concern smog is affecting the nation’s health. On Jan. 16, authorities warned people in northern regions to stay indoors as air pollution surpassed World Health Organization recommended levels by more than 15 times.

Steps to combat the haze come as the government also seeks to trim bloated industries. The State Council said in October it will reduce excess manufacturing capability in sectors including steel, cement and electrolytic aluminum.

Losses

Nanjing Steel reported a loss of 27.5 million yuan in the first nine months of last year, compared with a loss of 481.4 million yuan in the same period in 2012, according to an Oct. 30 company statement to the exchange.

Other exchange-traded bonds sold by steelmakers including Anyang Steel and Xinyu Steel are also at risk of being delisted, according to a Dec. 28 report from Guotai Junan Securities Co., the nation’s third-biggest brokerage.

Xu Lejiang, chairman of the China Iron & Steel Association, said Jan. 12 that about 28 percent of steel companies recorded losses in the first 11 month of last year, according to a statement posted on the association’s website. Xu is also chairman of Baosteel Group Corp., the parent company of China’s biggest listed steelmaker.

Although the association’s members posted a combined profit of 16.2 billion yuan in the 11 months, the margin of 0.48 percent was the lowest among all manufacturing sectors, Xu said.

Environmental Costs

“China’s anti-air pollution campaign is raising steel companies’ environmental costs and curbing their earnings,” said Helen Lau, a Hong Kong-based analyst at UOB Kay Hian Ltd. “Profits of the Chinese steel industry were marginal.”

Stricter measures will be implemented to improve air quality, among them the halting of new mills and shuttering of non-compliant facilities, the National Business Daily reported last month, citing the Ministry of Industry and Information Technology.

Shanghai Fosun High Technology Group Co., 100 percent owned by Fosun International, offers a full and irreversible guarantee for Nanjing Steel’s bonds, according to the note’s prospectus.

“Even though this particular bond issued by Nanjing Steel may avoid a default because of Fosun’s guarantee, credit risk in the company’s other borrowings is rising,” said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation’s second-biggest brokerage. “There’s a high probability China’s first bond default could be in the steel or coal industries.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Alfred Cang in Shanghai at acang@bloomberg.net