Chinese offshore property bond issuance doubles

Chinese offshore property bond issuance has more than doubled this year, while the average yield-to-maturity for non-investment grade bonds in the sector has risen to its highest level ever.
The city of Shenzhen in China
The city of Shenzhen in China

While other sectors have remained relatively quiet, China’s property sector has been on a bond issuance roll. 

Even though they have an additional six months to use up their bond quota, at least eight Chinese property developers have tapped the bond market this year. This has pushed the sector’s offshore bond issuance to the highest year-to-date volume on record.

The total value of Chinese property bonds issued offshore has more than doubled to $22.8 billion, while the number of offshore bonds issued by Chinese real estate firms has almost doubled to 54 deals.

That accounts for almost two-thirds of total issuance, a significantly larger proportion than in previous years. In contrast, real estate has accounted for a minority of the G3 bonds issued in Asia excluding Japan every year from 2013 to 2018.

The Chinese property bond market has seen the return of jumbo deals after a quiet 2018, with China Evergrande ($3 billion), Shimao Property ($1 billion) and Country Garden Holdings ($1 billion) all pricing sizable deals. High activity from single borrowers has also been observed in China Aoyuan Group ($1 billion via three deals), Guangzhou R&F Properties ($1.83 billion via four deals), and Yuzhou Properties ($1.5 billion via three deals).

It has become increasingly common for Chinese developers to entice investors with double-digit yields, thus widening issuance costs. Average yield-to-maturity levels for non-investment grade deals have crept up to a record high of 9.5%. In early March, for example, Modern Land (China) announced that it would issue $200 million of green senior notes due next year at 15.5%; the highest coupon in the history of Chinese property.

Property's bigger share of bonds

Asia (ex-Japan) G3 offshore bonds (Source: Dealogic) 

Issuances by Fantasia Holdings (15% yield), Guorui Properties (13.5%), Jingrui Holdings (13%), and Redsun Properties (11.5%) helped to achieve this high return mark. In contrast, investment-grade borrowers such as Vanke Real Estate ($600 million at 4.1%) or Sino-Ocean Holdings ($500 million at 5.4%) have successfully sold paper this year with stable yields. That has contributed to an average yield-to-maturity of 5% - just inside last year’s 5.1%.

The outstanding debt in this market due in 2020 and 2021 has also soared to its highest levels; with $75 billion due from 232 deals. This has been driven by the shift towards shorter tenor issues. Around 60%, or $15.6 billion, of total offshore Chinese property issuance, has come from bonds with tenors shorter than three years. This trend emerged last year when Chinese real estate issuers sold $41 billion short-term notes via 164 deals. That accounted for 70% of the sector’s issuance.

Tenors getting shorter

Asia (ex-Japan) G3 Property Bond Tenor (Source: Dealogic)

The splurge in offshore bond issuance by real estate firms is partly thanks to the generous quota policy of Chinese regulator National Development and Reform Commission (NDRC) for offshore bonds across various sectors.

In the past few months, the NDRC has announced quota extensions of offshore financing for 89 companies. In addition, Chinese market authorities have recently implemented other policies to support liquidity.

These measures have helped Chinese offshore corporate bond issuance grow to $35 billion via 85 deals this year-to-date, up from $31.7 billion raised from 68 deals during the same period last year.

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