China debt market is back as Kaisa troubles deemed company-specific
Lower rates at home likely to see high-yield issuers switch to onshore market, while investment-grade players to keep focus abroad
High-yield debt issuers from the mainland's property sector will switch onshore this year as China cuts interest rates, while those developers rated investment-grade will stay abroad as they are less affected by the still unfolding Kaisa crisis, say analysts.
"Investors see the Kaisa incident as more company-specific rather than sector-wide," said Standard & Poor's corporate ratings director Christopher Yip. "New issuance has restarted and some have been taken up quite well."
Despite a slow start, offshore issuance will probably catch up later with the full-year amount likely to match last year's, he told the South China Morning Post.
Mainland developers raised a record US$20.96 billion in overseas debt markets in 2014, with US$13.9 billion at the sub-investment grade, according to London-based real-time data provider Bond Radar.
So far, four developers, including Shimao Property and Greentown China, have issued a total of US$3.18 billion in offshore debt, 39 per cent of the amount raised in the first two months of last year, shows Bond Radar data.
The market closed for a while after Kaisa, reportedly embroiled in an anti-graft probe, missed a coupon payment on January 8. It squared the dues this month towards the end of a 30-day grace period.
"The pace of recovery will depend on how soon the Kaisa problem will get resolved and whether authorities will give investors a clear answer as to why they banned sales of Kaisa projects in Shenzhen," Moody's senior property analyst Franco Leung told the Post.
"Chinese developers' credit quality could worsen if their access to offshore funding tightens materially and risk premiums remain elevated for an extended period," Moody's said in a report dated last month. It estimated offshore markets accounted for 30-35 per cent of rated Chinese developers' total debt.
Weak players such as Glorious Property and Hopson Development face the highest refinancing risk due to their weak sales performance and large short-term debt, the ratings agency added.
A comparison of the latest issuances shows the cost went up for high-yield issuers, narrowing the gap with domestic loans. But developers with diverse ownership structures or government links were still able to access funds at much cheaper cost than onshore.
For example, Evergrande Real Estate priced its coupon rate at 12 per cent for a US$1 billion, five-year note on February 15, which will be used partly to refinance its 9.25 per cent, US$596 million paper maturing in January 2016.
But Sino-Ocean Land, backed by the country's No1 insurer China Life, was able to raise US$700 million through a 4.45 per cent five-year tranche and another US$500 million via a 12-year tranche at 5.95 per cent.
The benchmark interest rate for five-year loans from onshore banks stands at 6 per cent, after the People's Bank of China cut it in November for the first time in more than two years. Economists expect further cuts this year. Apart from being more selective, bond investors are demanding higher transparency in developers' bank loan covenants, Leung said.
The resignation of Kaisa's former chairman Kwok Ying-shing, whose family trust controls 49.3 per cent of the troubled developer, triggered covenant breach of a HK$400 million HSBC loan in December.
"If the cost offshore goes up too high, we can turn to the onshore market," said Shum Chiu-hung, chairman of the Guangzhou-based developer Times Property, adding that domestic rate cuts this year will help boost its profits.
Chinese authorities reopened the onshore debt market for developers in September after a five-year ban.