MOR issues bonds despite debt burden

The Ministry of Railways (MOR) started another round of bond auctions on Wednesday, despite concerns over the ministry's rising debt ratio, which emerged after the nation's spending spree on railway construction.

The ministry started auctioning 18 billion yuan ($2.84 billion) worth of new railway construction bonds with a maturity of 10 years, the capital raised from which will be injected into 33 rail construction projects that include many high-speed rail lines, the ministry said in its bond prospectus.

This marks the ministry's second issuance of enterprise bonds this year, following the sale of 10-year railway construction bonds worth 20 billion yuan, issued in June.

With the latest bond issuance, the ministry's fundraising via channels including enterprise bonds, short-term financing bonds and medium-term notes this year has reached 88 billion yuan.

The ministry has been continuing to pile up debt, resulting in a significant debt repayment burden.

"The interest payments alone have increasingly been a hefty sum. It is already time for the ministry to be alert to default risks," Zhao Jian, a professor specializing in railway economics at Beijing Jiaotong University, told the Global Times.

The continued fundraising efforts since 1995 have so far led to more than 28.7 billion yuan in interest payments per year on unmatured bonds and notes, according to figures from the bond prospectus.

The ministry's debt ratio has been on the rise over the past few years in the wake of the nation's lavish investments in railway construction, however, the ministry has expressed little concern about increasing its debt.

By the end of 2011, the ministry's assets totaled 3.98 trillion yuan, while its outstanding debt hit 2.41 trillion yuan, with the debt ratio amounting to 60.63 percent, but the ministry said the ratio remains "controllable." This compares to a debt ratio of 57.44 percent in 2010 and 53.06 percent in 2009.

"The government would ultimately to be forced to take on the burden, as the ministry could resort to claiming sufficient financial support from the government," Lu Zhengwei, Shanghai-based chief economist with Industrial bank Co, told the Global Times.

But even with the continued fundraising efforts, the ministry still finds it increasingly hard to ease capital thirst, industry analysts said.

"The railway ministry has largely been reliant on the bond market to collect capital, as the banking institutions have been increasingly wary of lending risks," said Li Lei, a transportation industry analyst with China Securities Co in Beijing.

He added that their capacity to raise capital however, has also been nearing a ceiling, given regulatory constraints.

The cumulative bond balance should be no more than 40 percent of corporate net assets, according to the country's relevant bond market regulatory policies.

A revival in railway investment would depend on reform in the railway sector, Li noted.

"The key resolution to growing challenges faced by the railway sector would be separating government administration and enterprise management as well as setting up large regional enterprises to specialize in railway-related businesses," Zhao said.

Last month, the ministry denied media reports indicating it planned to reform the nation's railway sector via the establishment of three separate firms - one in charge of railway investment, one for construction and another for operations. But it did not hint on more reform actions.

The government announced in May plans to open the railway sector to private investors, as part of the nation's long-anticipated railway reforms.

"Allowing private investment into the railway sector is a wise move, but the government should make more efforts to ensure the profit-making incentive for private capital tapping railway investment, as railway investments entail big injections and long waits before returns," Lu remarked.