Chinese developers are looking for alternative sources of financing as onshore credit dwindles, leading to a proliferation of offshore bonds.
Real estate companies accounted for more than 70% of dollar-denominated transactions out of China in the first two months of the year, according to Dealogic, as developers sought to lock in still relatively low interest rates, extend debt maturities and raise funds for land payments.
Volumes hit $5.6 billion with 13 deals for the first two months of 2014, which is not too far from 2013’s record breaking numbers of close to $7 billion in total volume with 18 deals during the same period.
The combination of big refinancing needs and Beijing’s ongoing urbanisation programme is likely to spur more Chinese property debt issuance, believe bankers.
But in recent weeks bond investors’ appetite for Chinese real estate names has weakened due to the glut of deals and mounting onshore debt defaults.
As a result smaller and financially weaker developers from lower-tier cities may struggle to raise capital. “In this environment, we believe financiers and investors will become more selective and favour borrowers with relatively strong credit quality, thereby further pressuring the liquidity of financially weak developers,” Franco Leung, Moody’s analyst told FinanceAsia.
Because of this, the high-yield space – which is dominated by Chinese real estate developers – has underperformed since the start of the year. From January 1 to February 28, the JPMorgan Asia Credit Index (JACI) non-investment-grade blended spread has widened by 30bp.
“China credit has been the weakest part of Asia credit in the first two months due to a combination of fundamental weakness and fears of oversupply,” said Viktor Hjort, credit analyst at Morgan Stanley to FinanceAsia.
“The China property high-yield space is expected to remain an underperformer for the next few months.” A number of the Chinese property bonds have even pushed the boundaries in Asia junk and tested investor appetite for credits lower down the curve.
But weaker sentiment has unfortunately resulted in a few flops. China Properties Group, a single-B rated developer failed to print its three-year high-yield dollar note end-February.
The bond was offering a double-digit yield of 12.75%, in a bid to attract investors in search of not only short-dated paper but also attractive returns. Bond buyers refused to bite.
Hungry for funds
Chinese developers' funding needs are likely to remain elevated for the rest of the year, supported by strong refinancing needs.
Deutsche Bank credit analysts predict a total of $16.06 billion of bonds – including convertible ones – from the mainland property space will become redeemable over the next 15 months.
Additionally, Beijing recently announced on March 16 a state-led infrastructure construction plan, which could help prop up the economy amid flagging growth.
The plan includes more residential real estate development over the next few years as the government seeks to move 100 million more people from the rural areas into the country’s growing cities from now until 2020.
However, the central government – treading a fine line between reining in rising property prices and addressing off-balance sheet problems – has stepped in with measures to clamp down on the availability of bank lending.
On February 24, mid-sized mainland lender Industrial Bank announced that it has stopped providing mezzanine debt – which has already been stopped by the big banks – and supply chain financing to developers’ suppliers, according to local news reports.
Chinese banks only issued Rmb644.5 billion ($103.9 billion) of new loans in February 2014 — just half the amount lent in January 2014, according to data from the People’s Bank of China.
The year-on-year growth in China’s monthly new loans for February was about 3.95%, compared to 23.26% for January. Also, the availability of trust loans – a financing staple to small-to-medium sized developers – has tightened in recent months due to increasing default risk of the market.
Trust financing makes up the largest slice of the nation’s vast shadow banking sector. With formal bank lending slowing, shadow financing rose to account for more than a third of new credit in the Mainland in 2013. This has hurt smaller, weaker developers and raised concerns over potential defaults.
As a result, a further consolidation of the real estate industry is anticipated to continue amid this credit crunch environment, believe industry experts. “We expect some small private ones to go bust and big ones to consolidate the market further,” Nomura’s China property analyst Jeffrey Gao told FinanceAsia.
In fact, one Chinese property company is already at the brink of a default. Real estate company Zhejiang Xingrun Real Estate, based in the Eastern town of Fenghua in Zhejiang Province, is on the verge of declaring bankruptcy as it doesn’t have cash to repay its Rmb3.5 billion ($560 million) worth of debt outstanding to its creditors that include more than 15 banks.
This came shortly after China reported its first-ever bond default from Shanghai’s Chaori Solar Energy Science & Technology on March 7.