China developers raise funds at home to repay pricier offshore debt

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HONG KONG/SHANGHAI (Reuters) – Chinese property firms facing a wave of maturing debt will raise funds on the mainland to refinance their offshore borrowings as funding conditions loosen in the world’s second-largest economy at a time when the dollar bond market is slumping.

Companies traditionally refinance bonds where they are issued to lower foreign exchange and transaction costs, but the coronavirus outbreak and ensuing scramble for dollars triggered a jump in yields for Asian debt. That has made it too prohibitive for companies to sell bonds offshore.

High-yield, B-rated dollar bonds issued by Chinese developers have seen their yields jump to more than 13% from less than 6% at the end of February, official data shows.

Yields in China’s bond market, on the contrary, dropped as authorities guided interest rates lower and pumped liquidity into the economy gridlocked by widespread restrictions to contain the spread of coronavirus. Shanghai’s interbank benchmark rate Shibor fell nearly 50 basis points during the same period.

“We will go wherever is cheap to borrow and wherever is reasonable to do more (financing),” Guangzhou-based Agile Group’s (HK:3383) Chairman Chen Zhuo Lin said at an earnings conference last week.

Agile, which has not issued any offshore bonds so far this year, has an offshore refinancing gap of $900 million in 2020, the second highest in the industry, according to Bank of America (NYSE:BAC).

Chen said the company would not rule out using dividends and internal capital to repay offshore debt, adding it was in talks to borrow offshore syndication loans, where interest rates were lower.

Developers such as Country Garden (HK:2007), the country’s largest, and Hangzhou-based Greentown China (HK:3900) also said they could reallocate their capital from onshore.

Longfor Group (HK:0960) and Times China (HK:1233) said they would focus on issuing corporate bonds in Shanghai, capitalizing on China’s loosening policy.

“The (Hong Kong) window now is not good, we won’t issue bonds even when we have the quota,” said Country Garden CFO Wu Bijun. “Onshore channels are more smooth.”

Some developers, including Sunac China (HK:1918) and Ronshine China (HK:3301), have taken advantage of the drop in dollar bond prices and repurchased some of their bonds from the open market.

Redsun Properties (HK:1996) and Zhenro Properties (HK:6158) said they would consider doing the same.

Analysts said they were not concerned about a spike in offshore defaults as most of the issuers were bigger companies that have multiple fund raising channels and many had sold dollar bonds in January when investor appetite was good. But risks for the smaller and weaker names would increase.

Regulatory approval is needed for companies to transfer onshore yuan to repay offshore bonds, but Bank of America analysts see scope for the regulator to approve remittances.

According to Moody’s, its rated developers’ total offshore issuance in March dropped to $3.7 billion from a record high of $16.5 billion in January, while onshore bond issuance increased to 18.4 billion yuan ($2.6 billion) in March from 10.9 billion yuan in February.

“Should markets stabilize, there should still be property developers looking to raise offshore USD financing,” Samantha Xie, J.P. Morgan’s head of China debt capital markets, said. “We would expect the first batch of issuers to be industry leaders, the top names.