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Covid-19: a transparency test for borrowers

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By Morgan Davis
24 Mar 2020

These are testing times for corporations around the world as they find ways to navigate the impact of the Covid-19 pandemic on their businesses and debt profiles. Now more than ever, transparency from borrowers is absolutely key.

The global spread of the coronavirus has caused mayhem in markets. Stocks have been battered and bonds have tumbled in secondary markets, with deal flow in Asia coming to a crashing halt.

For the most part, there is not much to be done outside of battening down the hatches, staying the course, and preparing for the future. But companies, particularly Chinese bond issuers, can do one more thing to comfort investors and support the market as much as possible — be transparent.

As DCM and syndicate bankers are always quick to point out, the market hates uncertainty. Investors and bankers would rather have clarity on the downward direction of the market than ride the rollercoaster of ups and downs with no clear idea of what's to come.

Because of that, now more than ever, companies need to be clear about the fundamentals of their businesses and what actions they are taking to stave off the growing impact from the virus outbreak.

Many Asian companies are in blackout periods, leaving them unable to say much until their quarterly results are out. But when those announcements are made, firms should aim to go further than what may feel natural, to show investors — for better or for worse — what they are doing, can do and will do, to ease the burden from Covid-19 on their financials and any refinancing pressure.

Take for instance Sunac China Holdings. On March 19, the high yield Chinese property borrower announced an opportunistic buyback of some of its outstanding dollar bonds. While a modest size, the repurchase and cancellation of $78.6m of notes maturing this year sent a positive message to the market, and was lauded by DCM bankers. It indicated that Ba3/BB-/BB rated Sunac has cash on hand, and it was willing to inject some liquidity into the market, a boon for investors that were keen to hold on to some cash.

Fellow Chinese property developer Golden Wheel Tiandi Holdings Co has also followed suit. It said on Tuesday that in January it repurchased about $43.4m of its $400m 7% 2021 notes. From January to March, the company purchased another $43.1m of the bonds. As of March 23, more than 10% of the original principal amount of the bonds had been repurchased and cancelled.

As bankers point out, such buybacks do not necessarily need to be disclosed to the stock exchange, but in an age of volatile markets and refinancing concerns, every little helps.

Refinancing pressure will be, and already is, a big worry for bond investors in the region.

Ratings agencies have been bombarding the market with updates to company performances, many of them highlighting downgrades or changes to outlooks because of uncertain refinancing plans and/or the impact of the coronavirus. It is, of course, difficult for companies to know exactly what impact the virus will end up having on their businesses, but it's important to keep the market in the loop every step of the way as much as possible.

Oil and gas company Medco Energi Internasional, for instance, has seen Moody's and S&P revise its ratings outlook to negative over the past few days. The Indonesian firm is under pressure as oil prices swing. But Medco Energi has been speaking to investors and keeping them updated, before conducting a successful tender offer of its $400m 8.5% 2022 notes last week. Other companies should pay attention.

In these difficult times for capital markets, no news is not good news. Instead, some news is better than no news, and companies should take that message to heart.

Investors may not be thrilled with the crunch that businesses are facing and the effect it will have on their bonds. But comprehensive disclosures can go a long way in quelling some of their worries. At the very least, it can create some goodwill in a market that is in desperate need of some positive news. 

By Morgan Davis
24 Mar 2020