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China's smaller developers getting cold shoulder from lenders

Hong Kong

CHINESE developers are finding the offshore loan market far less welcoming than its fixed-income counterpart, as sector limits and concerns over a property slowdown rein in lenders' appetite.

Smaller real estate borrowers have struggled to complete offshore syndications despite offering relatively attractive pricing, in a sign that international lenders remain cautious over the prospects for the mainland property industry.

Shanghai-based Zhenro Properties Group and Guangzhou-based China Aoyuan Group, formerly China Aoyuan Property Group, are prime examples.

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Zhenro's US$200-250 million-equivalent three-year loan got a tepid response during a long drawn-out syndication that lasted more than six months despite its deal offering a mouth-watering 610bp all-in pricing.

China Aoyuan paid 100bp more for its latest offshore loan than a similar facility a year ago, offering all-in pricing of 555.6bp on a margin of 495bp over Libor or Hibor for a US$164 million-equivalent three-year club loan in April.

Aoyuan raised US$313m-equivalent at the same tenor 12 months earlier.

"It's challenging to obtain credit approvals to lend to second-tier or third-tier borrowers without an existing relationship with the bank, no matter how rich the pricing is," said a Hong Kong-based banker at a Chinese bank.

The response from lenders contrasts with that of fixed-income investors, who have flocked to offshore bonds from low-rated Chinese developers.

High-yield bond sales from China hit a first-quarter record this year and have risen to US$27.7 billion so far in 2019, according to Refinitiv data. Both Zhenro and Aoyuan have sold US dollar bonds this year.

"We've been aiming since last year to reduce our exposure to the real estate sector as we're approaching the upper sectoral lending limit," said another banker at a Hong Kong-based bank.

Lenders are also concerned about a slowdown in the property sector. According to data from China National Bureau of Statistics, home sales (in terms of floor space) for the first three months in 2019 were down 0.9 per cent year on year, compared with an overall 1.3 per cent growth for the full year of 2018.

"If sales continue to decline, the liquidity of some weaker developers could be hurt, and we would be worried about their capability to service their debt," the second banker added.

Bigger developers continue to have access to bank borrowings at flat or even slightly lower pricing. Country Garden Holdings is offering top-level all-in pricing of 370.2bp for a US$1 billion-equivalent self-arranged four-year loan, down from 380bp all-in on a US$1 billion three-year deal in January.

A lack of support from overseas lenders could pose challenges for smaller developers facing heavy refinancing requirements in the coming months.

According to LPC data, US$33.7 billion of loans for PRC developers mature in the next 12 months. Moody's estimates US$39.7 billion of onshore bonds and US$17.3 billion of offshore bonds coming due by April next year.

Market participants said the offshore bond market could absorb a big portion of the expected supply given that sentiment among bond investors has improved since the beginning of the year, when the US Federal Reserve surprised the market with a pause in its interest rate increases.

"Given the improved risk appetite from investors, developers may find it easier and quicker to raise money in the bond market than in the loan market," said another syndicator at a Chinese bank, who added that he believes developers will continue tapping both markets given the extent of their refinancing needs.

Bond investors have been enthusiastic backers of high-yield bonds from the property sector, driving a rally that has run since the start of the year.

Last month, China Evergrande Group sold three, four and five-year US dollar bonds with coupons of 9.5 per cent, 10 per cent, and 10.5 per cent, respectively, down from five-year coupons of 13.75 per cent for its Hengda Real Estate Group unit in October. The Evergrande group alone has raised a total of US$5.6 billion from offshore bonds since the start of the year.

While Zhenro has struggled in the loan market, it has enjoyed an encouraging reception in the offshore bond market, raising US$1.2 billion from five US dollar bond sales so far this year. Its latest deal was a US$420 million 8.65 per cent bond due 2023 in late March, its largest, longest and tightest so far.

Not all developers have it easy in the bond markets.

"We see both onshore and offshore banks retrenching from lending to small and mid-sized Chinese real estate developers, especially those that don't have projects in large, urban centres," said Rahul Kotwal, founder and managing partner of Zerobridge Partners, a Hong Kong-based private debt adviser and asset manager.

"Many of these companies have resorted to tapping high-yield bonds, but the public debt markets are not available or appropriate for all borrowers," he said. REUTERS