OREANDA-NEWS. Chinese coal and steel companies will continue to rely on the commercial paper (CP) and super and short-term commercial paper (SCP) market to refinance their large amount of maturing debt, which could raise their liquidity risks if there is a sharp and sustained deterioration in the domestic bond market, says Fitch Ratings.

Chinese coal and steel companies have a large amount of CP and SCP maturing before end-2016. Fitch estimates Chinese coal companies have CNY249.9bn of publicly traded onshore bonds that will mature in May-December 2016, while steel companies have CNY186.8bn of these maturing bonds, about 75% of which are CP and SCP. The largest amounts of maturities are in August, October and November, when CNY72.3bn, CNY70.6bn and CNY83.1bn fall due, respectively.

The domestic CP and SCP market accounted for 72% of the domestic public bond issuance of Chinese coal and steel producers from May 2015 to April 2016. Most of the funds raised were used to refinance their maturing debt, especially bank loans.

We expect most coal and steel issuers to continue to rely on CP and SCP refinancing. This is because long-duration financing has become increasingly difficult to obtain amid a decline in investors' risk appetite. In addition, many highly levered issuers have exceeded the regulatory limits on onshore issuance of longer-dated bonds. An issuer's total outstanding amount of longer-dated public bonds cannot exceed 40% of its shareholders equity.

Many issuers, including local governments' state-owned enterprises (SOEs), which accounted for about 80% and 62% of the coal and steel bonds due before end-2016, have very fragile liquidity positions. We calculated that more than one quarter of issuers had cash balances that were below their short-term debt at the end of 3Q15 - these issuers have CNY180.3bn of bonds maturing in the next eight months.

While we expect the CP and SCP market to continue to provide liquidity for Chinese coal and steel producers in 2016, these companies face greater refinancing risks if the domestic bond market experiences a sharp and sustained deterioration. This risk is not yet imminent, but volatility in the domestic bond market has increased since end-March 2016, which is evident in wider credit spreads across the yield curve, including a roughly 10bp to 50bp widening in the gap between CPs domestically rated 'AA+' to 'AA-' and central government bonds as of end-April 2016. A large number of primary market deals, including new CP and SCP issuance, have been delayed or cancelled due to a number of credit events in the last six weeks.