China’s recent rule changes for offshore (cross-border) bond issuance by homebuilders and local-government financing vehicles (LGFVs) are likely to keep Chinese corporate annual issuance flat in 2019, compared with approximately $112 billion in 2018, and will effectively cap it at this level in 2020, says Fitch Ratings.
Offshore refinancing needs will be the main driver for cross-border issuance in 2H19.
In a move which aims to control the potential systemic risk caused by excessive leverage, the National Development and Reform Commission (NDRC), the Chinese macroeconomic management agency, has limited the use of proceeds from new issuance for homebuilders and LGFVs that are "local state-owned enterprises undertaking financing tasks for local governments".
These two sectors, which were the largest cross-border issuers, are now only permitted to use new offshore bonds to refinance medium- and long-term offshore debt maturing within one year. We believe the NDRC is very likely to enforce these restrictions in full. The issuance registration process now requires the homebuilders and LGFVs to clearly state their intended use of proceeds, including stipulation in bond offering memorandums by homebuilders.
Homebuilders with outstanding offshore bonds will not be immediately affected, but may have less flexibility to improve their cost of borrowing in the long-term, as refinancing will only be possible for debt maturing in the short term. Companies without outstanding debt will be effectively barred from accessing the offshore market and may experience pressures from tightening liquidity. Furthermore, the rules will limit the ability of these particular sectors to raise debt to finance investment.
However, we expect homebuilders' 2H19 offshore issuance to register only a mild decline from the $20.9 billion in 2H18. This is because the tightened rules do not apply to existing issuance quotas already registered with the NDRC. Furthermore, homebuilders' offshore bonds falling due in 2H19 and 1Q20 amount to $6.5 billion and $8.3 billion, respectively.
Issuance by LGFVs for the rest of the year is also likely to be driven by the need to refinance cross-border bonds maturing in 2H19 and 1Q20 ($6.4 billion and $1.9 billion, respectively). However, some LGFVs may not fall under the NDRC's definition, and therefore their ability to issue offshore bonds should remain intact.
The rules for cross-border issuance with tenors below one year, or the so-called '364-day bonds', have yet to be clarified by the NDRC. However, we do not expect a surge in 364-day bond placements unless it is evident that the regulatory framework will not be tightened for them.
We expect cross-border issuance for all other sectors in 2H19 to be limited largely to offshore refinancing requirements ($11.2 billion and $6.5 billion in 2H19 and 1Q20, respectively). This is due to weak offshore M&A activity.
Prior to the new rules, Chinese corporates' overall cross-border issuance reached $71.1billion in 1H19, up 4.5% from 1H18 and above our previous expectations. This was fuelled primarily by a 30.7% year-on-year increase in issuance by homebuilders. The sector's share in offshore new placements peaked at 60.2%, up from 48% in 1H18. Eight out of the top-10 bond deals in 1H19 were placed by homebuilders, led by China Evergrande Group's $6.3 billion worth of offshore bonds.
Homebuilders were accessing the offshore markets to refinance a portion of their onshore maturing bonds following earlier policy restrictions on their domestic issuance to curb excessive capital flow. The sector's cross-border issuance during 1H19 was more than double the sector's offshore maturities for the full-year 2019. By contrast, homebuilders' onshore issuance was Rmb208.2 billion (equivalent to $30.6 billion), well below the sector's Rmb345.5 billion in onshore maturities for the period.
Fitch Ratings looks forward to meeting you at the forthcoming China Fixed Income Summit 2019: Driving the bond market forward. Ying Wang, head of Asia-Pacific energy and utilities team and head of China Research Initiative at Fitch Ratings will be speaking at the China Fixed Income Summit 2019 in Hong Kong on September 26th. She will join the panel to discuss which sectors and structures are dominating the offshore issuance landscape and why.
Sign-up for free to receive China focused newsletter: Fitch on China
Fitch video: New Rules to Limit Chinese Corporates' Offshore Issuance
More insightful commentaries about China are available here