SINGAPORE - China's biggest airlines plan to sell the most bonds on record to fund growth even as the central bank is driving up borrowing costs and the industry forecasts a 46 percent plunge in profits on soaring fuel prices.
China Eastern Air Holding Co sold 500 million yuan ($76 million) of 5.31 percent five-year bonds on Feb 22, the only issuer among carriers in the BRIC economies (Brazil, Russia, India and China) this year. China National Aviation Holding Co, parent of Air China Ltd, and Hainan Airlines Co disclosed plans last week to offer a combined 15 billion yuan of bonds this year, setting the market up for the biggest issuance since at least 2005, according to data compiled by Bloomberg.
Yields on Chinese airline bonds are approaching their highest level in 14 months after the central bank raised borrowing costs three times since mid-October to damp inflation.
China's tighter economic policies "have raised the cost of financing," Liu Shaoyong, chairman of China Eastern Airlines Corp, the listed unit, said in Beijing on March 7. The company's parent received a 50 billion yuan five-year credit line from China Development Bank Corp last month, which includes 20 billion yuan of bills, notes and bonds, Liu said.
Chinese companies have sold 399 billion yuan of bonds this year, the busiest quarter on record, as the government encourages companies to sell debt instead of borrowing from banks.
In the past six months, investors lost between 1.8 percent and 7 percent on bonds sold by Air China, China Southern Airlines Co and HNA Group Co, a Hainan-based air transportation company, according to data from Chinabond, the nation's biggest debt clearing house. Yuan-denominated bonds sold by Chinese companies have lost 1.72 percent over the past six months, according to Bank of America Merrill Lynch's China Corporate Index.
The yield on Air China's 3.48 percent bond due March 2014 has risen to 4.73 percent from 3.61 percent on Oct 18, one day before the People's Bank of China, the central bank, announced the first of three interest rate rises, Chinabond prices show. China Southern's 4.1 percent note maturing in March 2014 yield 5.17 percent from 3.89 percent over the same period, the data show.
"The cost of capital for bonds is lower than for loans," said Yang Guibin, a bond fund manager at Shanghai-based Fullgoal Asset Management Co, which manages about 62.5 billion yuan in assets. "For companies, it's quite hard to get loans."
Global airlines might earn $8.6 billion this year instead of a previous forecast of $9.1 billion, compared with an estimated $16 billion in profits the industry generated in 2010, the Geneva-based International Air Transport Association said in a March 2 report on its website.
"It's a capital-intensive business as airlines have to keep expanding fleet and sales to compete globally," Li Lei, an analyst at China Securities Co in Beijing, said on Friday. "They may continue to suffer as China enters a cycle of higher interest rates and the world enters a cycle of higher oil prices."
Bloomberg News
