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China developers in rush to refinance costly bonds
[HONG KONG] Chinese property developers, among the heaviest borrowers in the Asian high-yield sector, are scrabbling to take advantage of cheaper funding costs at home, after a foray into offshore debt markets that has become a growing headache.
Tighter conditions in China in the last few years pushed developers to increasingly borrow overseas, and they did so at record pace in 2013 and 2014 - despite a domestic real estate market that was already cooling.
In 2015 though, they shifted to domestic markets, raising more than 200 billion yuan (S$43 billion) - four times greater than in overseas markets.
Now with the yuan weakening and relatively cheaper borrowing rates, analysts estimate most of the issuers of the roughly US$9 billion of bonds callable by property firms in 2016 will take up the option.
Nomura says 60 per cent of the callable debt is "likely" or "very likely" to be called, even if few firms say they have yet to make up their minds.
A further US$7 billion of dollar bonds are callable in the first quarter of next year, CreditSights said. "It will be compelling for most developers to refinance dollar bonds that become callable during 2016," said Mark Reade, credit analyst at Mizuho Securities in Hong Kong.
Powerlong Real Estate called its 11.25 per cent 2018 bonds in December to save costs. A company official told Reuters that investors were willing to lend at rates as low as 7.2 per cent, which would cut interest costs by a third, but the developer had sufficient cash and declined.
"At present, the focus is on issuing debt locally," said Lai Naixing, investor relations manager at Xinyuan Real Estate , which has an outstanding bond with a call option but has yet to decide its position.
Most developers lack a "natural" hedge in the form of dollar assets or revenues, and hedging is prohibitively costly. But dollar debt will still have its space for some, especially larger developers or those with overseas revenue.
CIFI Holdings, another real estate borrower with callable bonds, says it plans to redeem the bonds and issue fresh dollar debt - at a lower coupon. But even then, it has an eye on home. "The ratio of domestic-denominated bonds to foreign-denominated bonds is (currently) 45:55, we plan to adjust this to 55:45," a CIFI official said.
Evergrande Real Estate Group, which sold 20 billion yuan in local bonds last October, returned to tap the dollar bond markets to take advantage of lower yields this week.
It raised US$700 million at a yield of 7.8 per cent. "Overall, onshore refinancing is a beneficial trend for offshore investors," said Jim Veneau, fund manager at AXA Investment Managers.
"Interest coverage should improve as would overall FX risk of the issuer and onshore refinancing makes dollar debt relatively scarcer, so it's a positive technical or at least an offset to the negative technical new dollar debt issuance would otherwise be."