China Firms Aim to Repay Overseas Debt Early After Yuan Drop

  • Soho China, Gemdale, ENN Energy seek early note redemptions
  • Onshore yields at five-year lows are fueling local debt sales

At least three Chinese companies have said this month that they’re seeking to pay off overseas debt early, after the yuan’s tumble pressured the nation’s firms to do more to reduce foreign exchange risk.

Beijing-based property developer Soho China Ltd. offered Friday to redeem $400 million of notes due 2022 early. Natural gas distributor ENN Energy Holdings Ltd. proposed to buy back $400 million of 2019 bonds Thursday, and Shenzhen-based builder Gemdale Corp. announced a tender offer last week for all of its offshore notes of about $500 million.

Chinese companies that had borrowed in foreign currency at a record pace in the past three years are now shifting financing onshore where funding costs are lower. The yuan devaluation last month pushed up costs on servicing overseas debt, further burnishing the appeal of local debt sales. That’s driven a 23 percent increase in Chinese corporate onshore note issuance this year to 5.3 trillion yuan ($830 billion).

“The Chinese government is likely to want to keep interest rates low to stimulate the economy and the main income stream for most Chinese developers is in the yuan,” said Connie Heng, head of debt capital market at law firm Clifford Chance LLP in Hong Kong. “Combined with high FX hedging costs, some companies may prefer to repay their offshore debt early and tap the onshore market."

Clifford Chance has received a rising number of inquiries concerning liability management of that kind since the yuan’s drop in August.

Gemdale has issued two bonds in the domestic market totaling 5.5 billion yuan this year with coupons below 5 percent. The coupons on the three offshore notes it is trying to repurchase are 7.125 percent, 6.5 percent and 5.625 percent.

Telephone calls to Gemdale and Soho went unanswered.

ENN Energy said in its statement Thursday that the “tender offer is part of the company’s balance sheet management activities, and is being made to reduce the group’s outstanding non-functional currency denominated debts, so as to reduce foreign exchange risk.”

The yuan has dropped 2.6 percent since the beginning of August. Capital Economics Ltd. said Chinese companies may accelerate foreign debt repayments ahead of any Federal Reserve rate increases.

Yields on China’s onshore corporate bonds have plunged to a five-year low of 4.72 percent, a Bank of America Merrill Lynch index shows. China Vanke Co.,the nation’s third-biggest listed developer, on Thursday sold five-year notes at 3.5 percent, even lower than the rate on notes issued by China Development Bank Corp., the nation’s biggest policy lender.

“Given the yuan depreciation expectation, many Chinese companies will try to repay a large portion of their dollar borrowings,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “Depreciation expectation won’t disappear before the economy recovers.”

— With assistance by Lianting Tu, and Judy Chen

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