Chinese developers exploit short-term debt loophole

Loophole unlikely to last but illustrates cat-and-mouse game Beijing having to play as it tries to curb corporate leverage and deflate property bubbles.

Chinese property developers are using short-dated notes to circumvent official efforts to curb corporate leverage and deflate regional property bubbles.

The National Development Reform Commission, which regulates corporate bond sales, virtually closed the door in April on new offshore debt issuance by property companies. Some of China's most indebted home builders have nonetheless got around the restrictions by selling notes maturing in just under one year's time.

"There is a lot of interest from issuers to sell those short-term bonds as they get the benefit of not having to go through the queue process and the timing constraint from the NDRC," John Lee, vice-chairman of corporate client solutions Asia at UBS, said in a press briefing on Tuesday. "[Also], from an investor perspective they get a very good yield compared to a three to five-year paper.” 

Issuing bonds with maturities of one year or above have had to be registered with the NDRC since September 2015. But the approvals process has slowed in recent months, especially in the case of property developers and local government financial vehicles, as Beijing tries to rein in billowing corporate debt levels.

Yet, in a seemingly endless game of cat and mouse, as soon as the NDRC began tightening up, so lawyers and bankers advising Chinese issuers looked for ways to continue raising debt and quickly hit upon issuing so-called 364-day bonds.

“Dealing with Chinese regulation, [which is] typically opaque and confusing in its own way, companies can always find loopholes,” one Beijing-based debt capital markets lawyer said, preferring to remain anonymous. "If regulators close the loophole, there will be another one."

Or in the words of Lee, who joined UBS five months ago from Bank of America Merrill Lynch: “Being bankers, we have to be creative.” 

The speed with which property developers have bypassed the restrictions illustrates the tricky task facing the Chinese authorities as they work towards deleveraging the world's second-largest economy, managing a deceleration in breakneck economic growth, and cooling overheated land and house prices . Property investment growth rose by 7.9% year-on-year in June, according to National Bureau of Statistics, compared with 7.3% y-o-y in May.

Chinese issuers, mainly from the real estate sector, sold $2 billion of those short-term notes this year, compared with nil in all of 2016, according to Dealogic data (see the table below).

High-yield developer Fantasia raised $350 million from a 364-day senior short-term note in June, one of the first few seen in the Asian market and the first completed through a public book-building process in Asia. Greenland Holding Group and Modern Land (China) Co also printed 364-day private placements, raising $320 million and $130 million, at 3.85% and 6.5%, respectively.

Issuer sector Total face value $m No. of deals
Construction/Building 150 1
Real Estate/Property 1,550 7
Transportation 300 1
Total 2,000 9

Source: Dealogic

Closing the loophole

The NDRC didn’t response to FinanceAsia’s request for comment by the time story was published but it's only a matter of time, market insiders say, before the sub-one-year loophole is closed.

"It's certainly a grey area and you can be almost certain that the NDRC will close the loophole one way or another," said the Beijing lawyer. 

“The NDRC is aware of the issuance of short-term notes to bypass their scrutiny,” added the chief financial officer of a Shenzhen-based property developer, who also requested anonymity on the matter. “It is likely that the NDRC will announce new measures to fix the loophole.”
Just when is unclear, although Lee of UBS expects to have more clarity on the issuance tenor of offshore dollar papers from the NDRC before year-end.

The tighter offshore bond market conditions reinforce Beijing’s efforts, since the second half of last year, to curb onshore debt sales by property developers and, by extension, irrational land purchases and rising apartment prices. 

The NDRC on June 12 named and shamed five issuers – China Water Affairs, China South City, Mingfa Group (International), Ping An Real Estate, and China Mengniu Dairy – for not having registered with it before trying to raise debt and urged them to finish the process as soon as possible. The five companies issued offshore vanilla and convertible bonds and privately-placed notes this year. 

The authority also warned that companies failing to pre-register their offshore issuance plans would be added to a "national blacklist".

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media