Rating agency S&P says that State-Owned Enterprises (SOEs) in China’s Yunnan province face risks of entering financial distress while mentioning that the regional government “has taken a more active role in managing SOE risks” the past year. According to S&P, the five year average debt/EBITDA (a measure of leverage) crossed 16x at end-2020 vs. an average of 10x for all Tier 1 regions in China. Yunnan particularly has had a series of defaults recently and S&P notes that “SOE liabilities could hurt the government’s credit profile”. They add “despite a weakening in Yunnan government’s financial resources relative to SOE debt, the government has sufficient resources to support key SOEs”. Yunnan’s credit profile is seen as the weakest among Tier 1 governments and borrowings by the regional government and key SOEs would grow rapidly due to lower balances after capital account deficits.
Yunnan Energy’s 4.5% Perps were at 87.25, yielding 11.33% and Yunnan Construction’s 5.1% 2023s were at 100 yielding 5.1%