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[HONG KONG] Chinese companies that have borrowed heavily in global dollar debt markets are increasingly planning early repayments of their dollar-denominated loans and bonds as the Chinese yuan's weakness extends into the new year.
Bankers say the expected yuan depreciation over the next few years as US interest rates head higher and China's take the opposite track will push more companies to follow suit to reduce exposure to dollar debt.
China SCE Property Holdings Limited said on Wednesday that it would redeem its US$350 million senior note due 2017, while another real estate company, SUNAC China Holdings Limited, said it had completed the redemption of its dollar note due next year.
Under normal circumstances, non-investment-grade companies rarely redeem bonds early as they don't always have easy access to refinancing, but that is changing as the yuan's fall deepens and financing channels in China become available. "Most of the companies we talked to are waiting for the call option dates to arrive to redeem their bonds. The yuan has weakened sharply and funding costs in China's domestic market have become much cheaper now," said a debt capital market (DCM) banker at an American bank in Hong Kong.
Dollar bond issuances by Chinese companies started to pick up in 2013, and many of them carried call options that usually allowed issuers to redeem bonds three years later, so there could soon be a flurry. "Issuers started to contact us in September to ask about early redemptions of their dollar bonds, and such redemptions gradually came out since the end of last year," said a DCM banker at a Chinese bank in Hong Kong. "Even for companies that have sold dollar bonds without call options, many of them are consulting with us on how to redeem them ahead of due time," the banker said.
Chinese companies sold a total of US$60.3 billion worth of dollar-denominated bonds in 2015, more than six times the 2010 figure, Thomson Reuters data show.
The yuan posted a record yearly loss against the dollar last year and bearish bets on the currency hit a near six-year high as China's central bank allowed the currency to depreciate at a faster pace, a Reuters poll showed on Thursday. "Hedging cost for dollar debt is high as forward and option contracts are expensive now due to high volatility, so it makes sense to just adjust debt structure by cutting dollar debt exposure," said a corporate treasurer at a Chinese state-owned enterprise in Hong Kong.
China Eastern Airlines said on Monday it had recently repaid US$1 billion worth of dollar debt to reduce its exposure to currency volatility. It would adopt various measures in the short run to further optimise debt structure.
The company's dollar debt ratio is now just over 70 per cent, down from 80 per cent at the end of September last year, and the ratio would continue to fall, according to the board secretary Wang Jian.
Smaller competitor Spring Airlines will also pay back some dollar debt this year before it's due. "We started to do this from 2013 and got more aggressive after the currency reform in August," said Chen Ke, its chief financial officer.
The market consensus is for the yuan to fall further this year, though analysts are divided on how much. Kevin Lai, Daiwa's Asia ex-Japan chief economist, expects it to hit 7.5 to the dollar by the end of the year.