Developers Slump as Yuan Drop Closing Fund Window: China Credit
Volatility in the yuan is raising dollar borrowing costs for Chinese developers already choked by a domestic property-market crackdown and slowing sales.
Real-estate companies accounted for six of the 10 worst performers in Asia’s high-yield dollar debt market in the past month, according to a Bank of America Merrill Lynch index. The yield on Glorious Property Holdings Ltd.’s bonds due 2015 jumped 266 basis points, while that on Fantasia Holdings Group Ltd.’s 2017 notes rose 75 basis points, data compiled by Bloomberg show. The Shanghai Stock Exchange Property Index tumbled 8.9 percent, compared with a 2.7 percent drop in the benchmark.
The yuan’s record 1.4 percent slump last month as the central bank seeks to end one-way appreciation bets is narrowing one of the few remaining funding windows for developers, after a ban on onshore bond sales, limits on domestic bank loans and a crackdown on trust lending. New home price gains slowed in January, and Shanghai-based Glorious Property posted a 50 percent on-year drop in contract sales so far in 2014.
The yuan’s depreciation “has increasingly become a risk because it’s very clear the government wants it to trade two-way,” said Jinsong Du, head of property research at Credit Suisse Group AG in Hong Kong. “People need to price in that risk. You also have weakening sales and the government tightening money supply.”
A person who identified herself as a representative of Glorious Properties’ public relations department said in a phone call that the official spokesman wouldn’t speak on the matter because it is now the blackout period in China which restricts comments before earnings are reported. An external public relations agency for Fantasia said after two phone calls that executives were not available for comment.
The yuan’s 12.8 percent gain in the last five years prompted Chinese developers to issue $60.9 billion of bonds denominated in the greenback or in Hong Kong dollars. For example, 87 percent of the total debt of China Overseas Land and Investment Ltd., the biggest mainland developer traded in Hong Kong, are in the U.S. and Hong Kong currencies, according to Credit Suisse estimates. A call and an e-mail to China Overseas seeking comment weren’t returned.
The yuan, whose moves are restricted to 1 percent on either side of a daily reference rate set by the People’s Bank of China, slid 0.26 percent to 6.1440 per dollar as of 10:38 a.m. in Shanghai, according to China Foreign Exchange Trade System prices. This came after the monetary authority lowered the fixing by 0.18 percent, the most since July 2012, to 6.1312. One-month implied volatility, a measure of expected exchange-rate moves used to price options, rose 17 basis points this year to 2.02 percent on Feb. 27, the highest since May, according to data compiled by Bloomberg. The gauge was at 1.90 percent today.
The PBOC included an “orderly” broadening of the yuan’s trading band among its 2014 policy goals announced last month. Twenty of 29 analysts surveyed by Bloomberg News in February predicted the move will come next quarter, with 21 seeing the limit widening to 2 percent in its next adjustment.
A March 8 customs report showed exports unexpectedly fell 18.1 percent in February from a year earlier, compared with analysts’ median estimate for a 7.5 percent increase. The cut in the yuan fixing suggests a possible policy push to weaken the yuan to help exporters, said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB.
Asia ex-Japan issuers’ sales of high-yield bonds denominated in dollars, euro and yen have dropped to $5.5 billion this year from $9.8 billion a year earlier, according to data compiled by Bloomberg. A Feb. 26 sale by Far East Horizon Ltd., a financial services provider, was the last by a Chinese company before dollar note sales halted amid escalating tensions in Ukraine and as the yuan fell.
The drought may be set to end as Beijing Infrastructure Investment Co. plans to sell securities in the greenback after investor meetings in Hong Kong, Singapore and London from March 10, a person with knowledge of the details said. China Resources Land Ltd. was the last developer to issue bonds in the greenback, raising $1.1 billion from a sale of five- and 10-year bonds on Feb. 20, data compiled by Bloomberg show.
The average rate on Asian corporates’ high-yield notes in the greenback jumped 26 basis points this year to 7.84 percent, compared with a 21 basis point drop worldwide for similarly-rated firms, according to Bank of America Merrill Lynch indexes.
Issuing offshore bonds generally costs 2 percent less than selling trust loans onshore for developers, leaving a cushion for declines in the yuan, according to Andy Chang, Hong Kong-based analyst at Fitch Ratings.
“Unless the yuan continues depreciating at an abrupt speed, I don’t see immediate pressure,” said Chang. “The lower funding cost they can get in the offshore bond market is still the major influence on their debt-structure decisions.”
The currency’s drop this year is short-lived and will have little impact on the real-estate industry’s long-term borrowing costs, said Yifan Hu, chief economist at Haitong International Securities Co. in Hong Kong. The yuan will probably appreciate 2.9 percent by the year-end to 5.97 per dollar, according to the median estimate of analysts surveyed by Bloomberg.
While the year-end outlook for the yuan remains unchanged from before last month’s plunge, policy changes aimed at cooling property prices have lowered sales. At least 10 Chinese cities, many of them provincial capitals, have tightened curbs since November, with Shenzhen, Shanghai and Guangzhou raising minimum down payments for second homes to 70 percent from 60 percent. New home sales in Shanghai fell 23 percent in February from a year earlier, property consultant Shanghai UWin Real Estate Information Services Co. said last week.
“It’s a tough year for Chinese developers as property sales are likely to be worse and the yuan’s drop will add to higher borrowing costs,” said Yang Xi, a fixed-income analyst at Citic Securities Co. in Beijing. “Investors are demanding a higher premium for rising risks in the sector.”
Real-estate shares tumbled to an eight-month low on Feb. 28 after Industrial Bank Co. said it is delaying loans for such projects. Some developers may default on their debt as property-trust loans worth about 350 billion yuan ($57 billion) are maturing this year, according to Jefferies Hong Kong Ltd.
Investors have become more sensitive to any short-term indications of tightened funding amid increased leverage and moderating home sales, Barclays Plc analysts Alvin Wong and Jianping Chen wrote in a March 3 report.
The one-year interest-rate swap, the fixed payment to receive the floating seven-day repurchase rate, averaged 4.81 percent this year, compared with 3.8 percent in 2013. The gauge has declined 108 basis points to 4.30 percent today, from this year’s high of 5.38 percent.
Some Chinese developers are likely to have high leverage in the next 12 months after “aggressive” land acquisitions, while uncertainties in financing conditions and economic prospects will temper sales and price increases, Standard & Poor’s Ratings Services said in a March 6 note. It added that the ratings on some developers may face downward pressure as their debt increases may have outpaced property sales growth.
China should start preparing for risks from falling property prices as the sector is connected to about 60 percent of bank assets and liabilities and more than 60 percent of people’s wealth, China News Service reported on March 6, citing PBOC adviser Chen Yulu. The yield on five-year AA- notes leapt 13 basis points in two days to 7.82 percent on March 6, the most in almost four months as Shanghai Chaori Solar Energy Science & Technology Co. indicated it won’t be able to fully pay an 89.8 million yuan coupon due last week on its March 2017 bonds.
The developers should have hedged their foreign-exchange exposure from the very beginning, according to Credit Suisse’s Du. “If you ask them right now, they still think the renminbi will always appreciate. It’s like how some people in the industry believe housing prices will always go up -- it’s the same logic.”