China’s property developers flock to US dollar bond market

Chinese developers flocked to the offshore US dollar-denominated bond market in the past month, pushing January’s issuance to the highest single monthly level since October 2013, according to data compiled by Bloomberg.

After an already high US$1.3 billion issuance in December, another record was set with a total of US$3.785 billion issued by Chinese homebuilders in January, almost four times that from the same month a year ago.

The latest dollar bond spree started in late December when Vanke Real Estate Hong Kong, Logan Property and Greenland Global Investment announced their debt plans. In the following month they were followed by KWG Property, R&F Properties, Franshion Brilliant, Times Property, Yanlord Land, Yuzhou Property, and Beijing Capital Land. On Monday, Shui On Development was added to the list, selling a US$500 million 5.7 per cent bond, with US$3.3 billion in orders.

The offerings by Chinese developers, especially those that were non-investment rated, were embraced with zeal by the market. China Aoyuan Property, a bond rated by S&P as B-, was able to sell its US$250 million, three-year notes at 6.35 per cent coupon, at 10 times subscription, as yield-hungry investors chased a limited supply of high-yield bonds. Yuzhou Properties, a bond rated by S&P as B+, sold its US$350 million five-year notes yielding 6.1 per cent with a seven times subscription.

Three years ago, Aoyuan sold US$300 million of debt with a 11.25 per cent coupon. The bond is callable this year so the new proceeds raised could be used to refinance it, with cost significantly reduced.

Most of the other issuances are for the same purpose, as US$12.5 billion of US dollar bonds raised by Chinese developers are callable in 2017, according to Bloomberg.

Fielding Chen, a Bloomberg Intelligence economist, said a flurry of US dollar bonds sold by developers a few years ago are due soon or became callable this year, which has driven them to sell new bonds to refinance. Developers are also switching to the offshore market as they are mostly unable to tap the onshore market, a previous source of cheap funding, after Chinese regulators imposed a moratorium on debt raising to curb property bubbles.

Real estate firms also rushed to sell bonds before the end of 2016 in order to use up the approved annual foreign debt quota, according to brokers. Expected US interest rate increases are adding to the urgency of selling bonds before benchmark rates go up.