Hello. I’m James Willhite, with Wednesday’s update as the stock market’s bulls are taking a breather.
Futures are hovering between the flatline and a small drop. The Federal Reserve’s latest policy decision today isn’t expected to include any major moves, but investors are watching closely for the central bank’s first set of economic forecasts since December. Weak household spending is expected to have held down consumer prices in May. China’s industrial prices for the month just notched their biggest drop in four years. Read our full market wrap here.
Meanwhile, our Xie Yu explains how Chinese companies have managed to minimize bond defaults even as the country’s economy contracts.
Markets in a Minute
Chinese Firms Find Ways to Avoid Bond Blowups
By Xie Yu, markets reporter
Chinese companies are avoiding or minimizing bond defaults, even as the economy shrinks for the first time in decades.
China’s domestic corporate-bond market is one of the world’s largest, with a total face value of about $5.1 trillion, according to Wind. Yet while there have been defaults recently, the shock of the coronavirus pandemic hasn’t produced anything to rival high-profile U.S. collapses such as Hertz Global Holdings.
Some Chinese companies are asking bondholders to wait longer for repayment, to forgo the right to redeem bonds early, or to switch into new longer-dated securities.
Shandong Ruyi Technology Group, a fashion and textile group that has bought into The Lycra Co. and Britain’s Aquascutum, is among these debtors.
In March, it said holders of a maturing bond in yuan had agreed to receive interest privately, not through the Shanghai clearinghouse as previously planned, and to wait until June for repayment. On June 1, a state-backed firm said it wouldn’t make an investment in Ruyi as planned. That could complicate the textile group’s efforts to repay bondholders, and shows that just buying extra time won’t necessarily fix companies’ financial difficulties.
Qi Junwen, a fund manager at Hangzhou-based Yongan Guofu Asset Management, said some borrowers were swapping debt for new bonds. He said others were persuading investors not to exercise put options. These are a common feature of Chinese bonds and allow investors to demand early repayment.
These workarounds could make sense, Mr. Qi said, by keeping firms afloat, making investors’ track records look better and saving jobs and tax revenues for local governments. “When you look around, you see incentives for almost every party involved in a stressed investment to roll over the debts, rather than calling it default,” he said.
So far this quarter, defaults on nonfinancial corporate bonds in yuan have totaled about $626 million. That compares with defaults affecting about $65.3 billion of dollar-denominated nonfinancial corporate bonds, according to the Institute of International Finance.
There are parallels with China’s banking industry, where defaults have been muted by a coordinated effort to let companies and individuals defer loan payments.
“Defaults are being delayed,” said Ron Thompson, managing director and head of restructuring in Asia for Alvarez & Marsal.
For a longer version of this article online, follow this link.
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- The spread, or extra yield above government bonds that investors demand to own junk bonds, has returned toward levels seen before the selloff in March on both sides of the Atlantic. In Europe, the spread tightened to 4.69 percentage points, the lowest since March 6, as measured by ICE Indices. In the U.S., the spread has narrowed to 5.51 points.
- Vroom’s shares soared in their first day of trading, adding the online automobile seller’s name to a list of companies that had strong public showings in the past few weeks. The company’s stock, which is trading on the Nasdaq Stock Market under the symbol VRM, opened Tuesday at $40.25, 83% above its initial offering price of $22 a share.
- On this day in 1997, the Dow Jones Industrial Average closed above 7,500 for the first time, and The Wall Street Journal noted that the market’s climb “seems to inspire equal parts awe and dread among many investors.”
U.S. consumer prices in May, due at 8:30 a.m. ET, are expected to be unchanged from a month earlier. Excluding food and energy, prices are also expected to be flat.
U.S. Treasury Secretary Steven Mnuchin testifies to the Senate Small Business Committee on Cares Act implementation at 10 a.m.
The Federal Reserve releases a policy statement and its first set of economic projections since December at 2 p.m., and Chairman Jerome Powell holds a press conference at 2:30 p.m.
U.S. federal budget figures for May are out at 2 p.m.