China Petroleum & Chemical Corporation (Sinopec) Zero Coupon Convertible Bonds mainly contain s three types of risk: the credit risk, the interest risk and the industry risk.
Credit risks of an issue are directly related to the financial position of the issuer and are of great importance to zero-coupon bondholders because the interest and principal are canceled with an only single payment at maturity. Standard&Poor and Fitch have upgraded Sinopec long-term corporate credit rating in 2009 and 2010 respectively, due to their beliefs that Sinopec is a government-related entity (GRE). Thus, there is an "extremely high" likelihood that the PRC government will provide sufficient and timely extraordinary support to Sinopec in the event of financial distress. Nevertheless, there are at least four factors that may cause the default of Sinopec. Firstly, Sinopec highly dependence on third-party crude oil supplies and has mismatch between distillation capacity and crude supply; secondly, significant debt-funded acquisitions of overseas assets result in a potential of deterioration in its financial profile; thirdly, China's fuel pricing mechanism is evolving and lacks transparency, hence, short-term volatilities in refining margins may still occur from time to time; last but not least, Fitch expects the Chinese government to re-impose price ceilings should global crude oil prices rise beyond acceptable thresholds, thus increasing the risk of margin squeezes.
Risks of interest rates create a greater impact in zero-coupon bonds than in regular-coupon bonds, as coupon received by regular-coupon bond can be reinvested at a higher rate if interest rates rise. The very upset information is that in the pass several months, China has raised interest rates for the third time since October 2010, in the latest sign that the authorities were trying to temper economic growth and prevent inflation from escalating further. Considering the fact that Chinese government is battling with... [continues]
Credit risks of an issue are directly related to the financial position of the issuer and are of great importance to zero-coupon bondholders because the interest and principal are canceled with an only single payment at maturity. Standard&Poor and Fitch have upgraded Sinopec long-term corporate credit rating in 2009 and 2010 respectively, due to their beliefs that Sinopec is a government-related entity (GRE). Thus, there is an "extremely high" likelihood that the PRC government will provide sufficient and timely extraordinary support to Sinopec in the event of financial distress. Nevertheless, there are at least four factors that may cause the default of Sinopec. Firstly, Sinopec highly dependence on third-party crude oil supplies and has mismatch between distillation capacity and crude supply; secondly, significant debt-funded acquisitions of overseas assets result in a potential of deterioration in its financial profile; thirdly, China's fuel pricing mechanism is evolving and lacks transparency, hence, short-term volatilities in refining margins may still occur from time to time; last but not least, Fitch expects the Chinese government to re-impose price ceilings should global crude oil prices rise beyond acceptable thresholds, thus increasing the risk of margin squeezes.
Risks of interest rates create a greater impact in zero-coupon bonds than in regular-coupon bonds, as coupon received by regular-coupon bond can be reinvested at a higher rate if interest rates rise. The very upset information is that in the pass several months, China has raised interest rates for the third time since October 2010, in the latest sign that the authorities were trying to temper economic growth and prevent inflation from escalating further. Considering the fact that Chinese government is battling with... [continues]
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