Almost $6 billion in dollar bonds issued by Chinese developers are due to mature over the rest of 2017 and in the first quarter of next year, ensuring a steady supply of fresh debt as these companies refinance.
There is also more than $5 billion in bonds that can be redeemed before the end of the year because they have early redemption clauses. With interest rates creeping up from historically low levels, companies will be tempted to “call” the bonds now to avoid a more costly refinancing later, debt traders said.
“The current yields are still cheap for the Chinese high-yield developers given they used to pay 7 to 9 percent last time around,” said Yin Chin Cheong, analyst at CreditSights, an independent research firm.
Times Property, for example, issued 5-year bonds in April at 5.75 percent, having paid an eye-popping 11.45 percent to sell a 5-year bond in 2015.
“We are expecting dollar bond supply from Chinese high-yield developers to increase this year,” Cheong said.
About $3.2 billion in bonds are maturing before the end of the year and another $2.65 billion in the first quarter of 2018, Thomson Reuters data shows.
UBS estimates $7.3 billion out of $12.4 billion in callable bonds have been called so far in 2017, pointing to several billion dollars worth that could be refinanced by the end of the year.
Greentown China called its bonds due 2019 on which it was paying coupon of 8 percent after it sold perpetual bonds carrying coupon of 5.25 percent, extending the maturity of the debt and reducing its cost of funding.
“These refinancing needs cover both loans and bonds. We’ve seen five-plus new issues in the past few weeks and see more in the pipeline, including Agile and CIFI,” said Tony Chen, Hong Kong-based property analyst with Nomura, noting that Chinese authorities lifted curbs in June on offshore bond issuance by developers.
That provided a welcome offshore avenue of relief for some fund raisers following a sharp rise in domestic rates. For example, domestic bond yields for top-rated Chinese companies rose 170-basis points in the past nine months.
“Onshore yields have risen sharply and the government focus remains on deleveraging, so there is little scope for actively raising domestic debt,” said Steve Wang, head of research at BOC International. U.S. dollar interest rates have slipped back in recent weeks, he noted.
“So deal flow should remain active near term,” he said.
The flurry of debt issuance is likely to continue despite signs that China’s real estate market is cooling in some of the major cities.
Home prices in Beijing fell for the first time in more than two years in June, while Shanghai declined further and Shenzhen stalled, official data showed this month.
“This sector is about size – so regardless of market conditions all developers want to grow. If you are not big enough, you will no longer be relevant and get swallowed up by bigger rivals,” Nomura’s Chen said.
To be sure, the market was jolted in June by a large deal from China’s second most-indebted firm Evergrande, which could stunt investor enthusiasm in the months ahead, traders said.
The company’s 8.75 percent bonds due 2025 tumbled as much as six points on their trading debut for a yield of almost 10 percent, an unusually large price fall for a debut. The company had raised $3.8 billion in new funds and exchanged $2.8 billion of existing debt.
“Evergrande’s jumbo deal has repriced the market so we don’t foresee an explosion of high-yield property dollar debts,” said BOC International’s Wang.
Reuters
