With record debt maturing next year, Chinese developers set to tap offshore bond market

Chinese developers, who went on a offshore bond issuing binge in November as the regulator resumed approvals after the 19th party congress the previous month, will consistently tap the market next year since they need to refinance record debt maturing next year, according to analysts.

Mainland developers sold US$5.14 billion worth of US dollar-denominated bonds in November, more than five times the volume a year ago and the second biggest month in 2017 after June, according to data compiled by Bloomberg.

According to S&P Global Ratings data, US$5.4 billion worth of offshore bonds issued by Chinese developers and rated by S&P mature next year, and another US$9.4 billion in 2019. But repayment pressure is greater in the onshore market, with US$3.4 billion maturing in 2018 and another US$27.7 billion puttable.

But the pace slowed in December, with only US$2.1 billion worth of bonds sold until Thursday, with the latest issuer China Fortune Land Development selling its three-year, US$500 million note at 6.5 per cent coupon.

Analysts said this was because of rising market rates and investors’ limited purchasing quota.

“After a month of surging supply, the market’s ability to digest further issuance has been tested in recent weeks, [which] has added to developers’ difficulties to sell bonds.” said Christopher Yip, senior director at S&P Global Ratings.

The benchmark US 10-year treasuries rose from a low of 2.31 per cent in early December to 2.48 per cent on Thursday, according to Bloomberg data.

The National Development and Reform Commission, China’s main regulator, had suspended bond approvals since the second quarter.

“Before [the new approvals] we thought this year would be a small year [for offshore bond issuance],” said Ivan Chung, associate managing director at Moody’s and the head of Greater China Credit Research and Analysis, adding that bond issuances had not stopped over the second and third quarters as NDRC had approved them earlier.

Chung said that despite financing costs being higher than the onshore market, Chinese developers would be still keen because it offers a stable and easy financial channel that is less susceptible to regulatory volatility.

The Chinese regulator had basically stopped approving domestic developers from tapping the onshore bond market since November 2016 because of the government’s campaign to deleverage and to cool runaway growth in home prices.

“Obviously, authorities cannot shut refinancing channels completely for fear of instigating any systemic risk,” said Yip. “The key question is how tightly will authorities control the speed of approval and scale over the longer term. We expect offshore bond supply will increase, given the increasing refinancing need for developers, but funding costs will rise markedly.

“[Developers] will have to face the double pressure of both rising funding cost offshore, as well as slowing sale environment in China,” said Yip.