Chinese developers with large offshore debts will come under pressure from falling yuan
Chinese property developers with significant exposure to offshore debt markets will come under added stress if the weakness in the yuan’s exchange rates is prolonged, says ratings agency Standard & Poor’s.
In its latest report, S&P said Chinese developers with foreign-currency debt denominated in US dollars or Hong Kong dollars (pegged to the greenback) would likely suffer the most from further and sustained weakness in the yuan.
They lacked a natural hedge for their foreign-currency borrowings because their revenue, sales, and assets were held in China and denominated in yuan, S&P said. Hedging costs were also prohibitive in the offshore market, given that the yuan, also known as renminbi (RMB), is not freely traded.
The report did not name developers. But it is understood that major developers such as China Overseas Land & Investment and China Resources Land are among those with large amount of offshore debt.
“Depreciation is weakening debt-servicing and credit profiles across the sector to some extent,” the report said. “For companies reporting in Hong Kong dollars, a portion of debt levels, interest expenses, and earnings denominated in renminbi will be affected. For companies reporting in renminbi, their debt and interest expenses that are denominated in foreign currencies would be hit.”
But Standard & Poor’s credit analyst Esther Liu said the risk from the yuan’s falling trend was partially mitigated by strong growth of the domestic bond markets. That allowed developers to source cheaper yuan-denominated domestic bonds, both through publicly listed channels and private placements.
“Under our base case for developers, most issuers could withstand another 10 per cent depreciation from the yuan’s level at the end of 2015 before the ratings on the companies would be vulnerable,” Liu said. “That translates into a pain point of about RMB7.22:US$1.”