Urgent refinancing needs are driving two Chinese property developers, Fantasia Holdings Group and Greenland Hong Kong Holdings, to sell US dollar bonds. But high coupons are needed to get them away. So desperate is Fantasia’s situation, in fact, that its bond coupon is 15%, the highest for a US dollar bond from Asia so far this year.
Fantasia’s three-year non-put two US dollar bond is being marketed on Thursday at a final price guidance of 15%, and has an expected rating of B3 from Moody's, which is highly speculative and below investment grade. The purpose of the paper is to refinance existing debt.
Fantasia’s bond issue confirms a prediction that a Moody's report made in early August; that the Hong Kong-listed firm would require additional funding to replenish its land bank and to cover capital expenditure over the next 12 to 18 months.
Fantasia has a large amount of debt maturing or puttable over the next 12 to 18 months, including Rmb5.3 billion ($771.9 million) of puttable onshore bonds, $540 million 364-day offshore senior notes and Rmb1.6 billion of offshore notes. “Moody's is concerned that the company is increasing its reliance on offshore 364-day notes to fund its business,” the report noted.
Fantasia also has $300 million US dollar bonds that mature in February, as well as $140 million of US dollar bonds due in July next year. In mid-November, the company announced that it had purchased $6.74 million of February paper in the open market to reduce its financing costs and gearing. The Shenzhen-headquartered firm has Rmb20.9 billion in cash.
A Standard & Poor’s report at the end of May said it expects Fantasia to use its high cash balance to repay short-term debt due this year, including the puttable onshore debt.
Separately, on Thursday, Greenland Hong Kong sold $200 million 9.875% US dollar bonds due June 2020. Proceeds from the 1.5-year issue will be used to refinance offshore debt. “It will allow the company to obtain financing from international investors and improve its capital structure,” Greenland said.
On Wednesday, Moody’s rated Greenland’s bonds Ba3 with a stable outlook.
“Greenland faces refinancing pressure. The company's liquidity is likely to weaken over the next 12 months, given its rising short-term maturities and committed land premiums,” noted an S&P report on December 5.
The company has $200 million notes due in June and $450 million due in July, which will require substantial refinancing, S&P added.
Greenland’s cash balance of Rmb2.58 billion is insufficient to redeem these bonds.
Greenland and Fantasia join at least three other Chinese property developers which have issued US dollar offshore bonds since the end of November. The three - all listed in Hong Kong - are Kaisa Group, Logan Property Holdings and China Sunac Holdings. On October 31, China Evergrande Group, which is also listed in Hong Kong, caused a massive sell-off in the bond market with its $1.8 billion offshore bond issue.
Interest rates for high-yield offshore bonds have risen this year because of rising US interest rates and investors' risk aversion in view of the tough business conditions in China’s property sector, Moody’s associate managing director Franco Leung said: “The increased interest rates for Chinese high-yield developers also reflect expectations that developers' high-yield issuance will increase in view of their refinancing needs. Tenors are becoming shorter, which will reduce companies' refinancing cycles.”
Year-to-date, Chinese property firms have raised $44.26 billion from 133 US dollar bonds, which is more than the whole of last year with 85 bonds totalling $35.32 billion, according to Dealogic.
Two of China’s top three property developers, Evergrande and Country Garden, saw sales plunge in November, even after cutting prices by nearly a third at some housing projects, according to a recent report from Enodo Economics, a London think tank that focuses on the Chinese economy.
“Our advice remains to stay away from offshore issues of debt by real estate firms,” said Enodo.
Angus To, deputy head of research at ICBC International Research, disagrees. “We are not of the view that we should avoid the Chinese US dollar high-yield property credit space as a whole. While the risk of default cannot be ruled out, we believe the systemic risk is rather contained,” he said.
Joint global coordinators of Greenland’s bonds are Credit Suisse, Guotai Junan International, BOC International and CEB International.
Those of Fantasia’s bonds are UBS, Haitong International and Guotai Junan International.