Chinese developer COLI says considering hedging against yuan fluctuations

China Overseas Land & Investment Limited, the mainland developer with the highest exposure to foreign currency denominated debts, said on Wednesday it would consider swaps to hedge against yuan depreciation risks.

The state-owned property firm had consolidated bank borrowings and guaranteed notes of HK$103.65 billion as of the end of June, of which 46.5 per cent was denominated in US dollar, 31.8 per cent in Hong Kong dollar, 2.3 per cent in British pound and 19.4 per cent in yuan.

While of its total HK$78.61 billion bank balances and cash, only 3.8 per cent was denominated in US dollar, 26.8 per cent in Hong Kong dollar and 69 per cent in yuan. Except for the offshore 3.85 billion yuan loan, all the bank borrowings are unhedged, it said.

“Taking into account of the potential increase in interest rates and the possible fluctuations in the exchange rate of yuan, the group will prudently consider entering into currency and interest rate swap arrangements to minimize exposures if and when appropriate,” COLI said in its interim report.

Its core profit, excluding HK$2.69 billion fair value gain, rose 20.3 per cent in the first half from a year earlier to HK$13.63 billion. The board declared an interim dividend of 20 HK cents per share. Its share prices pared earlier losses after the result announcement to trade up 0.22 per cent to HK$22.95 in the morning.

The company and other peers including China Resources Land were sold off recently by global investors amid worries about their exposure to yuan depreciation risk as well as the slowing Chinese economy.

Global ratings agency Moody’s said on Tuesday that the yuan depreciation is credit negative for Chinese property developers given their significant foreign currency debt exposure, the majority of which is denominated in US dollars.

“Nevertheless, all else being equal, we believe the majority of our rated developers with material foreign currency debt exposure could withstand up to a 10 per cent depreciation of the yuan relative to foreign currencies,” the ratings agency said, adding that 10 per cent yuan depreciation is higher than its expectation and is just used for the sensitivity analysis.

The 42 rated Chinese developers Moody’s analysed -- based on their debt structure at the end of last year – had 35.5 per cent of foreign currency-denominated debt on average, including offshore bonds and bank loans, and the exposure is largely unhedged.

Moody’s said that although COLI and China Resources Land are among those with the highest exposure to foreign currency-denominated debt, they are less affected owing to their strong financial buffers and state-owned enterprise status or affiliation.

COLI’s adjusted net debt to net capitalisation ratios would likely deteriorate by only a marginal two to three percentage points for 2015 under the 10 per cent yuan depreciation scenario, among the lowest in Moody’s rated China property portfolio.