Tight Chinese credit market forces seafood companies into debtor's dilemma

Published on
March 22, 2016

There’s been a remarkable surge of Chinese seafood companies issuing corporate debt in recent months.

As Chinese banks tighten lending, especially to industries with overcapacity issues (seafood processors fall into this categorization), seafood companies have resorted to “private placements” – essentially high-yielding bonds sold directly to institutional investors by seafood companies that have been hit by a collapse in share prices since last summer and weaker demand in a slowing Chinese economy.

This month Shandong Homey Aquatic Development Co Ltd announced it had received approval from the China Securities Regulatory Commission (CSRC) to issue CNY500 million yuan (USD 76.68 million, EUR 68.5 million) in medium-term bonds. Also earlier this month, Dahu Aquaculture Co Ltd announced it had secured CSRC approval to issue shares in private placement. Last May, the firm issued 55 million shares through private placement to raise CNY 550 million (USD 83 million, EUR 75.4 million) for working capital and loan repayment.

And there’s been plenty of takers for this debt, given the generous coupons (typically 8 to 10 percent) paid by companies. As investors exit the still-faltering Chinese stock market, private placement debt has become an attractive source of yields for Chinese asset managers like Guotai Fund Management Company and Great Wall Fund Management Company – both of which have shied away from Chinese stocks.

There’s clearly a need for cash among leading seafood firms. Prominent processor Dalian Tianbao Green Foods Co Ltd announced on 9 March that it will take out a loan of CNY 190 million (USD 29.16 million, EUR 26 million) to replenish working capital from the Export-Import Bank of China with another CNY 60 million (USD 9.2 million, EUR 8.2 million) loan, also for working capital, from Huaxia Bank with repayment due in 12 months.

This new wave of costly debt issuing isn’t confined to the seafood sector. As China’s central bank has ordered bank nationwide to block loans to industries with overcapacity problems, private placements by Shanghai-listed companies jumped a dramatic 450 percent year-on-year in October and November, according to Reuters.

The banks loans will have helped export-focused Tianbao out of a short-term rut. But a major problem is the sustainability of this expensive debt. Can seafood companies hope to trade out of current financial difficulties? Or will companies already carrying and rolling over debt struggle to service and repay new debt – particularly at yields of up to 10 percent?

It will be worth keeping tabs on cannery and trawler operator Shanghai Kaichuang Marine International Co. Ltd., which raised CNY 1.1 billion (USD 170 million, EUR 150.7 million) last September through private placements for a tuna processing project and for working capital. Paying back loans is clearly a challenge, given Kaichuang has flagged its 2015 net profit to drop by a massive 80 to 100 percent compared with 2014 earnings of CNY 106.2 million (USD 16.4 million, EUR 14.6 million).

Servicing debt will be difficult in those circumstances – certainly with a sector as indebted as the seafood sector. And this is a problem that’s facing many Chinese seafood corporations, given leading processors of shrimp and tilapia like Baiyang Aquatic and Guolian Aquatic Group have both reported disappointing results for 2015. If finance is going to be so expensive for China’s seafood sector, investors will be keeping a close eye on repayments.

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