China tightens funding for real estate and infrastructure firms, limits use of offshore bond proceeds
Chinese developers have used offshore notes mainly for refinancing this year
China has moved to limit the use of proceeds from offshore bonds sold by developers and local government financial vehicles. In a statement late on Wednesday, the National Development and Reform Commission, which regulates companies’ foreign debt sales, said proceeds from offshore note issuances should be used to repay existing debt, instead of investing in domestic property projects and replenishing working capital.
“We have noticed that some firms, especially real estate companies and local government financial vehicles’ issuance of offshore notes has increased in the past two years. Some with small operating revenues and profits have registered outsized bond quotas that amount from US$500 million to billions,” the NDRC said, in a move that squeezes one of the few remaining funding channels for such companies.
“Developers’ funding conditions remain tight, not only because of stricter regulation, but also because of the increase in financing costs and weakened investor sentiment,” said Franco Leung, senior vice-president of corporate finance group at international ratings agency Moody’s.
Leung said the limits for Chinese developers were granted by NDRC on a case-by-case basis, with the commission assessing their planned use of proceeds before granting approvals. Chinese developers have used offshore bond issuances mainly for refinancing this year.
The developers’ refinancing risk has become a focal point as they face bond payments of US$77.4 billion in the domestic and overseas markets through to 2019, according to Bloomberg.
Country Garden Holdings’ 5.125 per cent 2025 bond fell by 0.8 cent to reach 89.6 cents on the dollar at 9.40am in Hong Kong, a record low. China Evergrande Group’s 8 per cent 2025 bond extended its decline to 89.9 cents, an all-time low.
Offshore financing is among the few funding channels still open for Chinese builders and local government financial vehicles, entities that finance infrastructure construction, with the Chinese government tightening access to the shadow banking sector since late last year.
The tight credit environment and a shift in mainland investors’ risk appetite towards caution forced a number of developers, including Country Garden and Hopson Development, to drop bond sale plans worth 34.1 billion yuan (US$5.15 billion) in May.
In the first five months this year, Chinese companies sold US$99.2 billion worth of offshore bonds, on top of US$235.8 billion last year, mostly in US dollars but also in Hong Kong dollars and the yuan, according to the NDRC. Real estate companies have till date sold US$32 billion worth of offshore notes, while local government financial vehicles issued US$5.4 billion in notes, according to Bloomberg data.
The commission has implemented a registration based foreign debt management regime since 2015, but can in practice bar companies from registration based mostly on the Chinese government’s industrial preference. For instance, some developers were unable to register with the NDRC for a few months last year.
As reported by the South China Morning Post, curbs on the use of proceeds have already been applied to the onshore bond market. The funds raised can only be used for refinancing, unless they are used for rental housing development, a policy priority.
The average onshore bond yield for B-rated developers surged from 5 per cent in end-2016 to 8.8 per cent by May 2018, according to international ratings agency Standard & Poor’s. Several developers, including Zhenro Properties, Guorui Properties and South China City Holdings, have had to offer investors a coupon of 10 per cent or more to complete sales.
It is not yet known if the new curbs will affect the incoming bond supply. A number of developers and local government financial vehicles, including Beijing Capital Land, Wuhan Real Estate and Tianjin Free Trade Zone, have held road shows recently.