Just when China's airlines are facing a struggle, Bank of China is pressuring them to find at least some unguaranteed finance for 1995 aircraft deliveries.
As a result CAAC affiliates, including flag carrier Air China, are testing the market by notifying Hong Kong financiers of their desire to arrange finance with at least some unguaranteed tranches.
The closest thing so far to an aircraft deal without a bank guarantee was last year's one-year bridge financing of three flight simulators for Air China by Sakura Bank.
Last December China's leaders emerged from a four-day economic summit with an agreement to keep a firm rein on the economy, restrict capital expenditure, and restructure or liquidate more money-losing state enterprises. As a result, Bank of China is even telling its preferred airline customers - the big three CAAC carriers Air China, China Eastern, and China Southern - to find more unguaranteed finance.
Other Chinese banks may step in with guarantees, but it is too early to say if events at the end of last year amount to a trend. Towards the end of 1994 People's Construction Bank of China guaranteed two aircraft deals and Industrial and Commercial Bank of China underwrote one. Analysts predict that China's strongest carriers can still fall back on Bank of China guarantees for now if their advances to Hong Kong fail. Other Chinese carriers and non-CAAC affiliates in particular - China's 37 approved airlines include just seven spinoffs from the decentralised CAAC - face a more immediate problem. Shanghai Airlines was probably the only one that ended 1994 in profit.
Ironically, guarantees are becoming more scarce just as financiers are growing more cautious. The past two months have seen a steady flow in other sectors of reneged contracts, defaults by Chinese borrowers, and the regional branches of major banks, including Bank of China, refusing to honour guarantees. Concerns voiced by Japanese lenders were soon followed by complaints from other overseas creditors, including US banks led by Lehman Brothers with $40 million in claims against the Shanghai branch of a Chinese investment corporation. So far, aviation has been free of debt disputes.
Standard & Poor's assistant general counsel issued a public and uncharacteristically sharp warning in December that China's ability to raise capital could be jeopardised by such growing concerns over the creditworthiness of its institutions. S&P stressed that it had no plans to downgrade China's triple-B sovereign rating, which is that agency's lowest investment grade debt rating.
Privately, some analysts concede that China's rating is already too high and that, even if it remains unchanged, financiers will be tightening credit policies for lending in China. If the rating drops, institutional investors would be excluded by their own criteria. Although not involved in Chinese aircraft funding, their retreat could cause some ripple effects in this sector.
To make matters worse, economists are predicting that China's growth this year will slow. Airline operating losses could deepen if last year's economic growth of over 11 per cent drops this year as predicted to between 9.4 and 6.5 per cent. Many Hong Kong investors are already saying the Chinese 'bubble' has burst. Under these conditions, tighter guarantee policies could effectively restrict China's fleet growth.
To make matters worse, economists are predicting that China's growth this year will slow. Airline operating losses could deepen if last year's economic growth of over 11 per cent drops this year as predicted to between 9.4 and 6.5 per cent. Many Hong Kong investors are already saying the Chinese 'bubble' has burst. Under these conditions, tighter guarantee policies could effectively restrict China's fleet growth.
Source: Airline Business
