China property

Highly indebted mainland developer China Evergrande to pay double-digit interest on US dollar bonds

  • Hong Kong-listed developer says its offshore units will issue the bonds and that its chairman will buy up to US$1 billion of notes
  • Analysts expect trend of high refinancing costs to haunt other Chinese builders as liquidity conditions tighten
PUBLISHED : Tuesday, 30 October, 2018, 9:48pm
UPDATED : Tuesday, 30 October, 2018, 10:55pm

China Evergrande Group, the mainland’s most indebted developer, is resorting to high-interest US dollar bonds, mostly in the double digits, to refinance existing loans, with analysts expecting a similar trend at other builders amid tightening liquidity.

The company’s short-term debt totalled 299 billion yuan (US$43 billion) at the end of June, according to S&P. The short-term debt accounted for 44 per cent of total debt, from 49 per cent in 2017.

According to Bloomberg, Evergrande’s overall debt load which stood at a whopping 671 billion yuan in the first half, was cut by 8.4 per cent after it repaid some bank loans.

Chinese developers face surging refinance demand as US$34.8 billion of onshore bonds and US$17.9 billion of offshore bonds mature or become puttable in the next 12 months, according to Moody’s.

The Guangzhou-based developer said in a filing to the Hong Kong stock exchange on Tuesday that its offshore entities propose to sell US dollar denominated bonds and that its billionaire chairman Hui Ka Yan has “expressed interest” to buy up to US$1 billion of the notes on offer.

Top developer China Evergrande seeks US$2.9b from convertible perpetual securities issue

The statement did not provide any details about the amount it plans to raise. But Bloomberg, citing sources, reported that Evergrande plans to raise about US$1.5 billion in three tranches.

Evergrande, China’s third largest developer by sales, also declined the Post’s request for further details about the bond issue.

But Franco Leung, associate managing director at Moody’s Investors Service, said the funding cost should be at or above 11 per cent.

Bloomberg reported that final price guidance on the two-year bond is 11 per cent, rising to 13 and 13.75 per cent for the four-year and five-year tenors, respectively.

“The refinancing cost is rising because of the tight liquidity facing the whole real estate sector, driven by high refinancing needs and likelihood of a slowdown in property sales growth,” said Leung. “We expect some small and low-rated developers to face high refinancing risks.”

Liu Feifan, a property analyst at Guotai Junan International, said for big developers like Evergrande to be able to sell bonds at 11 per cent was “a good deal”, while others with similar rating could pay 13 per cent or higher coupon to ensure subscription.

Evergrande sets sights on US$127.4b annual sales by 2020

Evergrande has a B1 rating from Moody, which upgraded its outlook to “positive” from “stable” in September, citing improvement in its debt leverage. Evergrande’s revenue covers 51 per cent of its adjusted debt as of June 30, 2018, up from 35 per cent at the end of 2017.

S&P Global Ratings too raised its rating on Evergrande to B+ from B in September.

Worries over China’s property sector has hurt Evergrande’s share price, which has lost 38.5 per cent of its value from its recent peak in August and some of its US dollar bonds have plunged to unprecedented levels.

Evergrande is also said to be in talks to raise US$1.5 billion by offering its Hong Kong office tower as collateral, Reuters reported earlier this month.