Chinese firms dive back into dollar bonds to refinance debt

Xinyuan Real Estate Co

02/09/2016 03:58

By Umesh Desai 
    HONG KONG, Sept 2 (Reuters) - Chinese junk bond issuers, led 
by real estate companies, have dived back into selling dollar 
debt after a hiatus, locking in the lowest yields in Asia since 
2013 and finding ready buyers in a global market where many 
bonds offer negative interest rates. 
    Rather than using the funds for business expansion though, 
debt bankers say most of the money is being used to either 
payoff maturing U.S. dollar debt, or to refinance existing debt 
at a lower cost. 
    "This has been the busiest August ever for Asian high-yield 
issuers," said Haitham Ghattas, head of debt origination at Asia 
Deutsche Bank in Singapore. "China real estate supply in 
particular will be driven more by refinancing, as land bank 
acquisitions have been more prudent and managing liabilities a 
key focus." 
    China accounts for more than half of Asia's high-yield 
dollar bond universe and property is the biggest contributor. 
    Bond dealers said they expected this trend to continue - 
especially if the U.S. Federal Reserve delays an expected rate 
rise until December. Many are looking to refinance more 
expensive debt and buy up callable bonds issued in the booming 
years of 2013/2014. 
    The rush of issuance reflects a sharp drop in yields. For 
example, China Aoyuan 2018 bonds yielded 11.25 percent last year 
and now trade at 4.5 percent. 
    The JACI index for China issuers  .JPMACCHN , reflecting the 
pricing of overall Chinese debt, has fallen this year to around 
280 basis points (bps) over U.S. Treasuries from 350 bps a year 
ago. Its broad Asia index shows yields at their lowest since 
2013. 
    "At these levels it would be inappropriate to call them 
high-yielding bonds. A lot of the redemptions in the year to 
date were not replaced by new bonds, so investors have a lot of 
cash to be put to work," said Terence Chia, Credit Suisse head 
of debt capital market syndicate in Hong Kong. 
     
    FALLING YIELDS 
    Yields have generally been falling globally as central banks 
cut interest rates, some to negative, to fight weak inflation. 
Fitch said the amount of sovereign debt with a negative yield 
had grown to some $11.4 trillion as of August 2 from $9.9 
trillion in April. 
    Thomson Reuters data shows that Chinese companies have 
issued $1.8 billion in high-yield dollar bonds in the first 
two-months of the July-September quarter, more than the $1.2 
billion and $1.4 billion in the first two quarters of the year, 
respectively. 
    They have issued $48.3 billion of overall dollar bonds in 
the year to date, compared with $67.7 billion last year. 
    More Chinese dollar bonds are due to mature as well, with 
scheduled redemptions set to jump to $24.8 billion next year 
from $10.5 billion this year. This excludes callable bonds 
maturing in subsequent years. 
    Dollar-bond issuance dried up earlier this year when Chinese 
companies were worried that a weakening yuan would leave them 
with a hefty debt-servicing burden. 
    Britain's vote in June to leave the European Union, which 
roiled global financial markets, added to uncertainties. 
    The yuan and global markets have since steadied, giving 
issuers more confidence. 
    "The ones that are coming offshore are mainly for 
refinancing their offshore bonds. If they (U.S. Fed) don't hike 
in September, more issuers will come out," said Annisa Lee, 
Nomura's head of Asia ex-Japan flow credit desk analysis in Hong 
Kong. 
    Refinancing can offer big savings for companies. 
    Xinyuan Real Estate  XIN.N , for example, sold a $300 
million 2019 bond  KY143179621=  in August at a coupon of 8.125 
percent, which could replace a 13.25 percent 2018 bond 
 KY092214109=  callable next month. 
    The deal would allow the issuer to extend the maturity of 
the debt by a year and reduce its interest cost by more than 5 
percentage points annually. 
    Bankers expect Chinese property developers to keep coming to 
the high-yield market. 
    "Chinese developers' profitability is under pressure as land 
prices are increasing, so they are looking at various options 
including offshore expansions. We expect this trend to continue. 
Funding offshore projects using G3 bond proceeds gives 
developers a natural hedge," said Moody's analyst Franco Leung 
in Hong Kong. 
 
 (Reporting by Umesh Desai; Editing by Neil Fullick) 
 ((umesh.desai@thomsonreuters.com; +852-2843-6935; Reuters 
Messaging: umesh.desai.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA DEBT/HIGHYIELD