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Chinese real estate companies face new obstacles in bond issuances

A number of prominent Chinese property developers, including market leaders Country Garden Holdings Co. Ltd., Guangzhou R&F Properties Co. Ltd. and Future Land Holdings Co. Ltd., canceled planned bond offerings in May as the credit environment continued to tighten.

Recent regulations have crimped developers' access to available credit and increased financing costs, making liquidity one of the most crucial concerns for the sector and its investors.

As many as 10 Chinese real estate companies have suspended onshore bond issuances valued at nearly 50.00 billion yuan in a single week, Economic Information Daily reported June 5.

Three main reasons lie behind the termination of these bond issuances, according to analysts and sources.

First, Chinese regulators recently called off the issuance of panda bonds — renminbi-denominated debt issued in China by companies incorporated overseas. The new policy has forced Country Garden's offshore unit and Hong Kong-based Hopson Development Holdings Ltd. to respectively drop their applications to issue 20.00 billion yuan and 3.10 billion yuan of panda bonds.

"The benefits of issuing panda bonds are the relatively low cost and the flexibility in getting the proceeds out of China. As the government is tightening its grip on capital outflow, it won't approve panda bonds," DBS Vickers property analyst Danielle Wang said.

China has been tightening the funding channels available to homebuilders in the past two years to prevent property speculation and put a lid on home prices, further deepening its efforts in 2018 with a nationwide deleveraging campaign, as policymakers seek to avoid credit risks in the real estate sector.

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Additionally, regulators have increased regulatory scrutiny over the reasons developers issue debt, which has caused many deals to be blocked or downsized, according to sources.

"The stock exchanges will review the purpose of each bond issuance and only reasonable requests such as refinancing will be accepted," an investor relations head at a major Chinese developer said.

A Hong Kong-based U.S. investment bank property analyst echoed the view. Citing the suspension of Guangzhou R&F's 6.00 billion yuan rental housing bonds, the analyst said the rejection was largely due to regulators doubting the company owns enough long-term rental apartment projects to secure the debt, as well as the fact that the use to which the proceeds would be put were undetermined.

Finally, higher funding costs in a tighter liquidity environment have spurred the offering cancellations. As investors grow more cautious, some developers have withdrawn bond sale applications.

The overall cost of corporate bonds in the real estate sector has increased by 175 basis points to 200 basis points, compared to 2015 and 2016, according to DBS' Wang, who noted that since some companies are able to opt out of issuing bonds after considering the high financing costs, it only goes to show their funding avenues may not be all that tight.

Additionally, a Hong Kong-based bond trader said investors are walking away from bonds with domestic credit ratings below AAA, now that the risk of corporate debt defaults in China is rising.

Financing channels remain open

The door to financing is not completely shut for developers, with most of them keeping their refinancing risks under control thanks to strong sales performances.

Yuzhou Properties Co. Ltd. Chairman Lam Lung-on said during a June 5 media briefing that while the credit environment is very tight, the country's top 50 developers still have access to bank loans, as most of them are priority clients for banks, and regulators would still approve certain domestic and offshore bond sales according to business development needs.

Lam added that the company plans to tap new financing tools to strengthen its cash management, including launching asset-backed securities to fund its supply chain.

Encouraging year-to-date sales results have also offset some liquidity concerns in the market. About 3.06 trillion yuan worth of new homes were sold between January and April, marking 9.5% year-over-year growth, official data from China's National Bureau of Statistics shows.

"Due to low inventories and government price cap measures, sell-through rates remain high in first- and second-tier cities, a very important driver of developers' ability to manage balance sheets. ... The default risk for developers remain low," Morgan Stanley analysts wrote in a May 30 note.

But the analysts added that they saw developers like Sunac China Holdings Ltd., China Evergrande Group, Guangzhou R&F and Agile Group Holdings Ltd. as having higher short-term debt compared to cash on hand, a factor market investors should not overlook.

Other industry sources cautioned that developers that continue to add leverage for expansion purposes will face mounting financial pressure in 2018, especially those with significant short-term debt maturities.

As of June 13, US$1 was equivalent to 6.40 Chinese yuan.