Body
On July 23, China experienced a horrific train crash involving one of its flagship high-speed railway lines, leading to the death of 42 people and leaving another 190 injured.
One question that has been raised post-crash is what the effect will be on the Ministry of Railways' (MoR) finances.The MoR has taken on massive amounts of debt to finance construction of the country's rail network, equivalent to 5% of GDP in 2010, and the interest on this debt has the potential to become significantly more expensive.
The Ministry's debt currently stands at 2.09 trillion yuan, a more than 50% increase since 2009. The MoR's debt burden will grow even larger as it has only completed 13 out of 23 planned high-speed rail lines. Caixin has reported that the MoR is already borrowing new money to meet its debt obligations.
Of the 2.09 trillion in debt taken on by the Ministry, 28% (585.5 billion) is in bonds. Most of these bonds appear to be relatively short term, meaning that they must be rolled over with new debt. Last year the MoR paid 125 billion yuan in principal last year and 25 billion in interest (of which 19.3 billion was interest on bonds). This year the combined total for interest and principal payments is expected to reach 145 billion for bonds alone. While we don't have the specific data, the estimated maturity for these bonds is relatively short term, perhaps 2.5 years on average.
With concerns over the future of rail after the crash and debt worries now rampant in China, interest rates necessary to attract buyers on new debt are significantly higher, making the debt burden more expensive. On July 21, the MoR failed to auction off all its bond's for the first time in its history, even after offering a yield more than twice as high than the previous year. Post-crash debt issuances have been in the three month range, an unusually short tenor for long-term infrastructure projects, and have been at relatively high interest rates (5.15-5.55%). These short term debt issuances mean that the MoR will likely have to roll over these debts repeatedly, a task that could prove quite expensive if investors continue to worry about the Ministry's creditworthiness.
Long-term, the MoR expects to raise revenues through ticket sales and fees from increased rail freight traffic made possible by these new lines. However, if the crash represents a shift in public opinion away from high-speed rail, the Ministry could find its future revenues less than expected. Indeed, the MoR's own numbers for ticket sales on these new lines are not inspiring and China's air carriers seem to be benefiting from concern over high-speed rail safety concerns. MoR officials have recently announced that they will be lowering speeds on many of the high-speed lines, a move that that will further reduce the attractiveness of rail when compared to air travel and may mean that freight volumes will be lower than anticipated.
Not all is doom and gloom, several factors argue for guarded optimism when looking at the MoR's debt situation. The Ministry still has a large number of assets at its disposal and its overall debt to assets ratio is a reasonable 58.5%. Moreover, there are several available channels if the MoR faces a financing crunch.
The first is bank loans. The majority of loans continue to come in the form of bank loans and the banks have indicated that they do not intend to raise rates as a result of the crash (although some banks may be unable to lend more to the Ministry).
Secondly, IPOs are another potential source of funding. Beijing-Shanghai High-Speed Railway Co. Ltd., the owner of the the new high-speed route between these cities, previously announced intentions to raise up to $7 billion by selling shares to the public and international investors. The IPO has been postponed as a result of the crash, but it and other rail holding companies could proceed with IPOs if market sentiments improve later on.
Finally, some analysts are predicting that the Ministry will receive a capital injection from the central government, a move that could ease the short-term credit pressures.
Despite widespread caution amongst investors, the Ministry has one staunch advocate of its creditworthiness. Dagong, the same rating agency that garnered attention by being the first to downgrade the U.S., recently announced that it has awarded the MoR a AAA rating. The agency awarded the MoR a higher rating the Chinese government itself, generating criticism of its rating procedures.