China’s developers take advantage of cheaper offshore debt

Mainland China developers have seen offshore financing costs reduced significantly amid a relaxed domestic lending environment that has prompted more issuers to issue debt at home.

Mid-sized developer Powerlong Real Estate on Friday priced its US$200 million, three-year senior notes at 7.625 per cent, a 3 per cent saving from the rate on the senior notes it issued in 2014 -- the lowest rate the company has ever paid on offshore bonds.

The issuance was four times oversubscribed, the company said in a statement.

This month another developer, Future Land Development, issued its US$250 million offshore senior notes at a record-low annual interest rate of 6.25 per cent.

“The supply of offshore bonds declined a lot this year,” said Moody’s senior analyst Franco Leung. “The offshore market has sufficient liquidity right now .”

The reopening of the domestic bond market to developers last year and six interest rate cuts by the central bank over the past year has freed up liquidity and lured mainland property firms away from the offshore bond market to the domestic market.

In the first nine months of this year Hong Kong-listed Chinese property bond issuers’ onshore issuance surged to 115 billion yuan (HK$139 billion), from 11 billion yuan for the full year in 2014. In contrast, offshore issuance fell 55 per cent for the first nine months to 9 billion yuan.

Liao Min Shun, Powerlong’s chief financial officer, said the average onshore bond issuance cost for listed developers could be only 5 per cent, lower than project loans borrowed from domestic banks.

Powerlong said it planned to issue its first domestic corporate bond in the next two months. “ We will focus more on domestic financing to optimise our debt structure,” Liao said.

However, Liao stressed that the Hong Kong listed developer wanted to maintain a good relationship with overseas investors. “We want to keep our offshore financing channel, that’s why we issued bonds in Hong Kong this time,” he said.

Meanwhile, the large, state-owned developers receive more favourable rates using domestic financing. China Overseas Land & Investment, one of the largest state-owned mainland developers, issued 8 billion yuan in domestic bonds this week with rate set at 3.4 per cent for the first tranche and 3.85 per cent for the second.

“There is still much room for the domestic bond market to grow and demand is very strong,” Shi Kancheng, chairman of Zhong An Real Estate and China New City Commercial Development, told the South China Morning Post. Both companies are listed in Hong Kong. “Bonds offer an option for private funds in the domestic market and they do not account for lending quota in the nation’s banking system,” he said.

Moody’s Leung said overseas investors are looking forward to more offshore bond issuance from property firms as sales in the domestic property market have gradually stabilised this year.

“It would be normal for the borrowing rate to be 2 or 3 per cent lower than before,” he said.