Debt refinancing

Chinese developers’ dollar bond rush belies weaker 2020 pipeline

Only few weeks into the new year and the market has seen a huge surge in US dollar offshore bonds issued by Chinese real estate firms, but this can’t last experts claim.

January still has a way to go and Chinese property developers have already issued more than $10 billion of offshore bonds, roughly double the monthly average of $5.5 billion.

“Particularly in the past two weeks, there has been a big increase in issuance of US dollar offshore bonds by Chinese developers,” Franco Leung, managing director of Moody’s an international rating agency, told FinanceAsia.

Only yesterday (January 20) for instance, two Chinese developers listed in Hong Kong, DaFa Properties and SOCAM Development, announced plans to tap the bond markets. On January 16, China Evergrande Group, China’s biggest developer by sales, maintained the momentum by raising $2 billion.

Chinese developers are very keen to get refinancing now. There are $27 billion of offshore bonds from S&P-rated Chinese developers maturing in 2020, S&P estimated.

At the same time investors are equally keen to pick up the paper, driving financing costs down. “We have seen the tenor of the US dollar bonds lengthened and the cost of funding is more attractive for issuers, as the coupon is lower,” Moody’s Leung noted.

Last year, many offshore bonds issued by Chinese developers had a tenor of two to three years, some even shorter than one year. Anything over four years was rare. In the third quarter last year, the weighted average coupon rate of US dollar bonds issued by Moody’s-rated Chinese developers was 8.7%.

As an example of longer tenor and lower coupon, Country Garden issued $550 million of senior notes due in 2027 with a coupon of 5.125% and $450 million due in 2030 with a coupon of 5.625% on January 14.

Not all Chinese property players enjoy this luxury. Evergrande’s $2 billion of bonds, rated B2 and B by Moody’s and S&P Global respectively, comprised $1 billion of senior notes with coupon of 11.5% due in 2023 and $1 billion of senior notes with coupon of 12% due in 2024.

However, this is still below what the secondary markets have been pricing in. “With restricted volumes, funding costs may become even more differentiated. For some developers, offshore yields to maturity have surged well beyond the mid-teens, reflecting low investor confidence,” said an S&P Global report on November 4, 2019.

ABUNDANT LIQUIDITY

So why the strong recent appetite? This is partly down to the abundant liquidity for the US dollar bond market. Investors appear reassured there is healthy inventory as well as stable property sales and prices, Leung said.

This fits nicely with the agenda of the property developers who are using up their quotas for last year granted by the National Development and Reform Commission (NDRC), the Chinese government body overseeing bonds, Leung said.

“The onshore funding channels remain generally tight for Chinese developers and is not as liquid as the offshore bond market. So, the developers want to capture the offshore market windows,” Leung added.

Tight funding conditions within mainland China are driven by the Chinese government’s desire to curb property speculation. The China Banking and Insurance Regulatory Commission said it intends to clamp down on property speculation by strictly preventing “the illegal flow of credit into the property market and continue to prevent a property bubble.”

OFFSHORE BOND ISSUANCE TO BE LOWER

The total value of US dollar offshore bonds issued by Chinese developers soared 52% to an all-time high of $75.2 billion last year, according to Centaline Property Agency. But for this full year, Chinese developers’ offshore bond issuance is likely to be lower than last year, Leung predicted.

This is because of NDRC rules implemented in July 2019, which says only Chinese developers with refinancing needs within 12 months are eligible to issue offshore bonds. Under these rules, Chinese developers with no refinancing needs within 12 months will not be granted new quotas for issuing offshore bonds this year.

For instance, the two sets of bonds totaling $1 billion issued by Country Garden on January 14 will be used to refinance offshore debt which will mature within one year, the developer said.

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