China developers’ dollar debt spooks
investors
Mounting US bond issuance and risk of wider market downturn
bring pressure to deleverage China’s property market is slowing down just as developers
are rapidly accumulating dollar debt © Bloomberg Share on Twitter (opens new
window) Share on Facebook (opens new window) Share on LinkedIn (opens new
window) Share Save Save to myFT Topic Tracker Don Weinland and Sherry Fei Ju in
Beijing 11 HOURS AGO Print this page2 China’s Evergrande was supposed to scale
back its towering debt pile this year, leading the country’s property sector in
a much needed deleveraging. But a surge in US dollar borrowing has investors
worried the burden will actually grow. Local developers have doubled their US
dollar bond issuance to $32bn since the start of the year, according to data
from Dealogic, as they seek to refinance higher-cost and shorter-term debt.
Some investors have welcomed the wave of issuance as a sign the companies are
focused on paying down more costly bonds onshore, where repayment pressure has
mounted with Rmb267bn ($39.7bn) still to mature this year.
Yet as China’s property market cools, there is a growing
risk the sector will end up with unmanageable debt. Evergrande is China’s most
highly indebted property developer, owing a total of more than $100bn, while
the industry faces a wall of more than $300bn in maturing debts in the next
two-and-a-half years. With official concerns rising about unsustainable debt
growth, a number of developers have pledged to reduce their overall leverage,
led by Evergrande and its billionaire chairman Hui Ka Yan. The company cut its
debt by about Rmb70bn in 2018 and is aiming to chop another Rmb80bn this year,
according to CreditSights. Its total debt to equity ratio fell to 219 per cent
at the end of 2018, down from 303 per cent a year earlier, according to S&P
Capital IQ. Alaa Bushehri, head of emerging markets corporate debt at BNP
Paribas Asset Management, said her company saw Evergrande’s leverage levels
“remaining stable or even going down” over the next few years. But the company
has led this year’s charge into US dollar debt in Asia, raising $6.6bn as of
mid-April — the most of any company in the region excluding Japan. Its total US
dollar and renminbi-denominated debt stands at just over $100bn, according to
S&P Capital IQ. Demand for the company’s bonds has at times proved feeble,
with Mr Hui in November forced to prop up a $1.8bn bond issuance with $1bn of his
own money even after offering a high interest rate of 13.75 per cent on the
notes.
The only solution for
[Chinese developers] is to keep borrowing more and more every year Kevin
Lai, Daiwa Capital Markets Evergrande’s US dollar debt of about $18bn puts the
country’s second-largest developer by sales in the top tier of the world’s most
indebted private companies, according to Dealogic. Among non-state-run groups
in emerging markets, Evergrande has the seventh-highest outstanding dollar
debt. “There aren’t that many companies in the world with that much outstanding
dollar debt,” said Paul Lukaszewski, head of Asian corporate debt and emerging
markets credit research at Aberdeen Standard Investments. Rivals Country Garden
and Dalian Wanda, among China’s top five developers, are not far behind with
$14.7bn and $13.9bn in dollar debt respectively. Evergrande, Country Garden and
other developers have justified their high leverage by citing the need to
expand in what has often appeared to be a market with limitless demand for
homes. China’s politburo, the country’s highest decision-making body, sent a
strong signal this week that regional housing controls, which hold back demand,
were unlikely to be loosened. It said regulators would focus on curbing
speculation, which has fuelled property market growth and high house prices
over the past decade. Analysts say that if developers do not move quickly to
deleverage before a sharper downturn in the property market, they could be
caught out with little ability to continue raising capital. Chinese developers
face a wall of $325bn in maturing debts by the end of 2021, most
renminbi-denominated. US dollar maturities are set to peak at about $39bn in
2021, according to Dealogic. “The risk is for developers with high gearing not
to use this opportunity for deleveraging before the market cools” even further,
said Philip Zhong, a property analyst at Morningstar. Otherwise, the
combination of a slowdown in mainland China and a build-up in dollar debt
threatens to end badly for some developers, economists say. Repaying US dollar
bonds could become a problem in the event of strong currency outflows from
China, said Kevin Lai, Daiwa Capital Markets chief economist for Asia excluding
Japan. Beijing carefully controls its capital account and guards against
outflows that put downward pressure on the renminbi. The inflows from
developers that are using US dollar bonds to pay off renminbi debt have boosted
demand for the country’s currency, so have been encouraged by China’s foreign
exchange watchdog. But paying interest and principal on the offshore debt could
prove much more difficult. “They will have trouble converting it back because
that will put a lot of pressure on the currency,” Mr Lai said. “The only solution for them is to keep
borrowing more and more [offshore] every year. But they can’t go on like that
forever.”
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