China Builders’ Offshore Debt Sales Set to Slow on New Rules

By Bloomberg News
(Bloomberg) --The frenzied dollar debt issuance spree by Chinese developers is set to slow after authorities tightened the screws on overseas funding amid rising credit risk concern. On Friday, the National Development and Reform Commission said foreign debt issuances by real estate companies can only be used to refinance mid- to long-term overseas debt maturing in one year. They were also asked to keep a “reasonable proportion” of domestic and foreign debts as well as a mix of short-term and long-term maturities offshore, according to a statement. The greater scrutiny by Chinese authorities on credit risks is likely to slow overseas debt issuance by developers and add funding pressure on smaller peers with weak finances, analysts said. Developers have sold a record $55.4 billion of dollar bonds so far this year, a jump of 80% from the year-earlier period, Bloomberg-compiled data show.

Here are analyst views on China’s latest measures:

 

Zhou Yue, Pei Tao, analysts at Sinolink Securities wrote in a report:

"The tightened rules will curb funding flow to the property development sector, and financial institutions such as trust companies will increase borrowing costs and strengthen risk controls. Smaller developers that have limited funding resources and weak sales capability will face rising pressure. Though the developers can quickly collect receivables now, the tightening rules will limit builders’ refinancing ability to roll over old debt, which will cool down the housing market."

Annisa Lee, head of flow credit analysis at Nomura International (HK) Ltd:

"It seems like the new regulation is to prevent land and property prices from further going up as many developers have issued offshore bonds year to date to fund land acquisitions. This should help reduce offshore bond supply for the sector and should support pricing. That said, it may be negative to bond prices of smaller scale property developers that may rely on offshore bonds to refinance their onshore debt."

Cedric Lai, a vice president and senior analyst at Moody’s Investors Service said in note:

"The latest measures will reduce the quotas available for developers to issue offshore bonds, and reduce their flexibility
in using the issuance proceeds. We expect the latest tightening measures will widen credit differentiation, with large and financially strong developers set to further increase market share, supported by their better access to funding and stronger sales execution."

Zhang Xu, chief fixed income analyst at Everbright Securities Co, said in a note:

"Restrictions on the use of proceeds mean that Chinese developers will not be able to use the funding for onshore purposes nor will they be able to use it for new projects. Overall, the new rule will curb developers’ new issues of mid- long term debt in the offshore public market."

Chuanyi Zhou, credit analyst at Lucror Analytics:

"The government may be reiterating the rules, probably with stricter execution, given the large amount of new bonds  issued by developers recently. This round, NDRC is more specific with “mid to long-term overseas debt maturing in one year”, cutting off the channels to raise offshore bonds to refinance onshore, or issue new bonds to extend maturities of 364-day bonds. The latest move signals tighter controls on real estate financing and closer watch on the use of proceeds by the developers."

Adrian Cheng, director of Asia-Pacific corporate ratings at Fitch Ratings:

"We believe this only applies to new NDRC approvals, so any potential inaugural offshore issuers with existing  approvals can still go ahead with the issuances. Many small property developers would have got existing NDRC  approvals already, and there would be further impetus for them to try to do an inaugural issue this year. Many existing issuers with established offshore issuance channels should not be affected by this, as they have largely been used for offshore refinancing only. Those without existing NDRC approvals, and without established offshore markets will be further squeezed."

--With assistance from Ina Zhou.