The Chinese government’s reform efforts are likely to help two-thirds of 53 Moody’s-rated Chinese state-owned enterprises (SOEs) realize lower-leverage levels this year versus 2016, according to a new report by Moody’s Investors Service. Debt/EBITDA, in particular, will fall.
“ … Reform measures underpin the continuing reduction in leverage levels,” the report’s authors said. “Specifically, the reforms related to SOEs, which aim to increase their efficiency and profitability, as well as supply-side reforms, which are targeted at lowering leverage and costs for Chinese corporates and removing excess capacity in certain industries. Both reform programs will increase EBITDA and curb debt growth.”
Moody’s senior vice president Kai Hu said the aggregate average debt/EBITDA for the 53 SOEs rated by the agency will fall to 5.4x this year from 5.5x in 2016 and 5.7x in 2015.
SOEs in the commodity sectors have stronger standalone credit quality that will help them weather future downturns in commodity prices, Moody’s said. “The 2016-17 recovery in such prices has boosted the EBITDA for SOEs in the metals and mining, oil and gas, and agriculture and food sectors. While Moody's price assumptions for commodities in 2018 are moderately lower than the average for 2017, the SOEs' cost savings, capital spending cuts and more conservative financial policies will enable them to continue deleveraging through 2018.”
Still, leverage will grow for a third of Moody’s related Chinese SOEs, with debt/EBITDA rising more than 0.5x for 12 rated firms at the end of the year versus the end of 2016. Seven of these firms are power and gas utilities that can’t pass on increased fuel prices to customers fast enough, show large planned capital expenses or both.
– Nicholas Stern, managing editor