Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt

Tyler Durden's picture

Earlier today, Macquarie released a must-read report titled "Further deterioration in China’s corporate debt coverage", in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with "uncovered debt", or those which can't even cover a full year of interest expense with profit.

The report's centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample."

To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known.

What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

We now know, and the answer is truly terrifying.

Macquarie lays it out in just three charts.

First, it shows the "debt-coverage" curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies - all in the cement sector - had "uncovered debt" 8 years ago.

Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.

And then in 2014, everything just falls apart. Quote Macquarie, "more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel."

Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.

It means that last year about CNY2 trillion in debt was in danger of imminent default.

The situation since than has dramatically deteriorated.

So are we now? Macquarie again: "Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime."

In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can't even generate the cash to pay down the interest on their debt, let alone fund repayments.

We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.

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VWAndy's picture


Mark Urbo's picture

Been saying for a long time...


..and catching shit on this site, but China is a house of cards and they are going down.

38BWD22's picture



What about the Chinese bearing manufacturers?  Bearings are practically a commodity nowadays.

83_vf_1100_c's picture

  Well that sucks. Where will I buy my cheap plastic crap at now?

Spitzer's picture

Just wait till China starts covering all of these losses with forex reserves. And all of the inflation that the US exported there comes back.

new game's picture

they must depeg, but will they? find the value of the yuan, but will they? markets(remember swissy)are already doing it as they accum yuan fx to hold the peg, ha. cornering themselves from the inevitable. ways to go as behind the scenes t's sold.

then the house crumbles fast. but wait, they have 1 T bonds to liquidate first, ha, this shit is gonna get real. yellow girl,get ready to expand that bal sheet to 5.5 T, ha again as qe 4 will be a massive bond buy program to keep the us goverment ponzi alive for another breath...

other option is usa equities tank and the flight to security save yellow ass and they pick up the slack to the tune of 500B, JMFO.

Proofreder's picture


"Can't pay"

 Not: Won't pay or pay you later, little at a time ... just plain Can't Pay - I gots' no money, nothing (cue the yougetnothing clip)  Velocity of money is ZERO.

Can't squeeze water from a rock, blood from a turnip, or cash from a broke chink.  Soon a travling broke culture will arise, like gypsies - a source of migrant workers and mercernies. But it's all ok, because conflict is good and lots of good is right around the corner. The Revolution may not be televised, but it will be Twittered.    Aaah, tweeted?  Screwit.

Got Popcorn?

MalteseFalcon's picture

Just lend these companies the money to make their interest payments.

Where's my Nobel?

ThroxxOfVron's picture

"Just lend these companies the money to make their interest payments.

Where's my Nobel? "


At the pawn shop.

Not Goldman Sachs's picture

Too comlex. Just print and give. A necessary gov action for the people.

Cosmicserpent's picture

Greek style.  Money in the backdoor.

junction's picture

So, Chinese commodity companies have the credit worthiness of a subprime auto lender.  In 2008, before Hank Paulson shoveled trillions of taxpayer dollars in the form of TARP money to banks and insider financial institutions like Goldman Sachs, Wall Street was facing total collapse.  Good thing the Feds and the drug cartels were there to bail out the Ponzi scheme fraudsters. 

techpreist's picture

Now we know why so many rich Chinese are buying everything up over here and building ghost cities; their companies are going bankrupt, and they are dumping their money in anything tangible they can get to escape the coming storm.

In reality, a lot of investments are going to zero over there. I would be sad, except it might actually be a good thing when folks with more modest income over there can afford a place to live again.

Nah, who am I kidding? The Party will not let the price of anything go down.

Buck Johnson's picture

No, there running because they know their countries history.  When it faulters or it tumbles the populace (which is large) looks for people who are responsible.  Remember before they went after the rich and the political and had them arrested and executed.  That is why they are trying to get their money out and their asses along with their family.  They don't want to end up being executed by the public.  Remember China's economy has no middle class, it was made with the hot economy and money that has been propelling it for years.  Once that is gone it's back to peasants and bad land that cant support it.  I still say that China is going to take over either Africa, Australia or Canada in the future, mark my words.


shovelhead's picture

Chinese don't fuck around.

Some cops were beating a woman on the street and a crowd gathered to yell at them to stop.

At first they didn't. Then they did. The crowd beat the police to death and the Army had to go in.

They had to collect a few stray odd pieces of cop here and there.

No games.

THE COIN's picture

Once i listened to that one clip i had to keep going and listen to 12 more.


MFL8240's picture

And 100% of the US Banks are insolvent!

buzzsaw99's picture

only when cash flow is lower than payroll + bonuses + dividends will they have a problem. their asset books are irrelevant.

ebworthen's picture

No worries, the Treasury and the FED have their backs!

Bailouts, MBS purchases, QE, all they can take at the back door at 0.025%.

You and I have to pay 4%-29% on what the banks lend us.  What a deal man!

If that ain't a Ponzi the Pope is Jewish, America is a Republic, and Russia is evil.

J Pancreas's picture

I'm a fully invested shareholder in BAC, JPM and WFC and am a proud Discover card holder with a limit of $750. I find your comment inaccurate and place my full confidence and life savings in Brian Moynihan's soft hands.

fockewulf190's picture
Yóuxì jiéshù de rén! Yóuxì jiéshù!

(Game over man! Game over!)
J Pancreas's picture

Was Vazquez in that film a hairless guy or an ugly woman? Inquiring minds would like to know.

blindman's picture

take it higher goldilocks,
i me be listening.

general ambivalent's picture

Red sky at night, sailor's delight.

OC Sure's picture

Deflationary bust or here come rising prices? 

Marginal producers default, go out of business, less goodies are produced, prices rise. Prices rise, CBs raise rates (yeah, right?), more marginal producers go offline, prices rise again...repeat.

CHoward's picture

Fuck 'em.  I'm tired of this shit.

RockyRacoon's picture

I believe you've about summed it up.  No charts, graphs, or technical analysis of any kind required.

joego1's picture

It looks like it all goes to the ah fuckit bucket.

surf0766's picture

How many nails for a coffin?

trulz4lulz's picture

By the looks of things, it seems as though a coffin wont be a luxury for many of us.

Personality Disorder's picture

thoes Chinees, so tricky.

philosophers bone's picture

Sounds like they just need to change GAAP again or have the analyst community create a new non-GAAP financial measure to bring the ratio under 1:1. No problem.

Oldwood's picture

What do we remember about 2008? Not only were borrowers over extended, but the supposed assets were suddenly devalued as well. How long have we heard stories about Chinese firms quadruple pledging commodity assets, with lenders coming to find empty warehouses. There is such massive oversupply of everything in China, once payments fail to be made, the dominoes will fall hard and fast. Deflation of everything they have except food, clean water and air.

RockyRacoon's picture

Clean air and water?  Ooopsie!

FredFlintstone's picture

does all of this have anything to do with the recent explosions over there?

nmewn's picture

Of course it goes without saying, anyone still in China and even remotely connected with Macquarie will soon be getting a courtesy call from Vice Minister of Public Security Meng Qingfeng and his merry band of "patriot guards".

To check the strength of attachment...of their fingernails ;-)

Element's picture

What I resent is people calling Macquarie a 'bank', when it's just another flavor of calamari.

buzzsaw99's picture

zirp can totally fix this

cheech_wizard's picture

I'm expecting to see a massive dump of US debt in 3...2...1...

About $1.27 trillion at last count.