Fed move offers relief to developers
Highly geared property firms on the mainland will be the most affected once credit tightens
The US Federal Reserve's decision last week to postpone the tapering of quantitative easing might offer psychological relief to some highly geared mainland developers, which have nearly US$8 billion in outstanding bonds due to mature from now to next year, but it is unlikely to spark a market turnaround.
Investment bank UBS expects the tapering of quantitative easing could return in January, even though the Fed shocked the market on Wednesday by saying it would continue with its bond-buying stimulus programme.
Kaven Tsang, a vice-president at credit agency Moody's Investors Service, said liquidity would undoubtedly be tightened once tapering took place.
"Those companies with lower credit ratings will be the most affected", he said, as they could face higher borrowing costs when seeking to refinance loans.
Among the 42 developers that Moody's rates, Tsang said companies rated in the single-B range or below, such as Evergrande and Kaisa, would face higher lending rates in a credit-tightening environment.
According to data compiled by financial markets data provider Dealogic, the total value of bonds issued by mainland developers due to mature this year stands at US$1.08 billion, with a further US$6.66 billion due next year and US$7.83 billion due in 2015.
But Tsang said major developers such as China Overseas Land & Investment would not be affected because their cash-flow position had improved significantly after strong property sales in the first half of this year.
Faced with a credit crunch at home in 2011, growing numbers of mainland property firms rushed to raise funds by tapping the international bond market.
By September 18, the total value of US dollar offshore bonds issued by mainland real estate firms this year was US$7.68 billion, 37.63 per cent more than the US$5.58 billion for the whole of last year and more than three times the US$2.34 billion in 2011, according to Thomson Reuters.
Alfred Lau, a property analyst at Bocom International, said major developers including Agile Property and Shimao Property refinanced their offshore bonds earlier this year and extended the offshore debt maturity by two to four years.
But he said some firms would have to slow the pace of land acquisitions and, depending on individual circumstances, maintain annual contracted sales growth at a rate of between 5 per cent and 42 per cent over the next four years.
At one extreme, Lau gave the example of Yuexiu Property, which has outstanding offshore financing amounting to 11.83 billion yuan (HK$14.9 billion) and free cash flow of 1.6 billion yuan. He said it would have to maintain annual sales growth of 42 per cent over the next four years.
At the other end of the scale, China Resources Land, which has outstanding offshore financing of 27.6 billion yuan and cash flow of 6.4 billion yuan, would need to achieve annual sales growth of just 5 per cent for the next four years, he said.
Lau said Shui On Land, which has US$2.58 billion in outstanding bonds maturing between December this year and 2015, and Evergrande, which has US$2.25 billion in outstanding bonds due for maturity between January next year and January 2015, were facing more financing pressure.