China Inc. Retreats From Dollar Bond Market With 50% Cost Saving

  • Redemptions in 2016 reach $1.73 billion, up from $26 million
  • Lower onshore borrowing costs, weakening yuan prompt shift

Chinese companies that rushed to the exit from the U.S. dollar bond market have few regrets. They’ve cut borrowing costs by about half while avoiding risks from a slumping yuan.

Firms from the nation have redeemed $1.73 billion of overseas notes before maturity this year, jumping from $26 million a year earlier. Five of the six companies that called their bonds were builders. Sunac China Holdings Ltd. redeemed $400 million of 12.5 percent bonds due 2017 in January and then sold 1.5 billion yuan ($230 million) of domestic bonds with a coupon of 5.2 percent. Future Land Development Holdings Ltd. bought back $200 million of 10.25 percent 2018 notes last month after it issued 3 billion yuan of onshore notes at 4.5 percent.

The yuan’s four-year advance through 2013 prompted companies restricted from domestic markets to borrow dollars offshore and invest in higher-yielding developments in China’s booming economy. Those liabilities are now being unwound after the yuan dropped 4.3 percent in the past year and the central bank slashed interest rates in response to the slowest economic expansion in a quarter century. Corporate bond sales onshore have almost doubled this year, as offshore issuance in the greenback dropped 32 percent.

“Given the uncertain outlook for the yuan and cheap onshore interest rates, it makes sense for Chinese companies to turn onshore for funding, especially for developers,” said Zhou Hao, senior economist at Commerzbank AG in Singapore. “The trend is likely to continue.”

KWG Property Holding Ltd., a Guangzhou-based developer, said in its 2015 annual results that it capitalized on policy changes that allowed property companies to sell bonds onshore and issued 3.3 billion yuan of domestic notes in December. Its 2.2 billion yuan six-year onshore securities sold in December pay a coupon of 4.94 percent, compared to the 8.25 percent on $400 million dollar bonds sold in 2014.

“The new issuance will enhance the Group’s financial position to effectively improve its structure and lower borrowing costs,” it said.

Hopson Development Holdings Ltd. said last week it would redeem its $300 million 9.875 percent notes due 2018 on March 17 at 104.9 percent of the principal amount.

“More Chinese companies are rushing to redeem their offshore bonds," said Raymond Chia, the Singapore-based head of credit research for Asia excluding Japan at Schroder Investment Management Ltd. with assets of about $446.5 billion under management. "They have lower funding options such as refinancing existing dollar notes with a cheaper dollar debt, and other funding alternatives such as domestic bonds.”

Diverging Costs

Yields on top-rated five-year onshore corporate notes have dropped 92 basis points in the past year to 3.3 percent whereas yields on Chinese companies’ offshore high-grade dollar notes have risen 2 basis points to 3.39 percent. 

“Onshore companies have been able to take advantage of cheaper onshore bond market to retire offshore bonds which tend to be more expensive,” said Clement Chong, a Singapore-based credit analyst at NN Investment Partners, which managed $202 billion globally as at Sept. 30.

Right now Chinese companies are able to issue onshore notes at coupons on average 3 percentage points lower than comparable offshore dollar bonds, according to Jamie Tadelis, head of sales at SC Lowy in Hong Kong.

The yuan is likely to weaken to 6.7 against the dollar by the end of 2016, according to the median forecast by Bloomberg.

Goldman Sachs Group Inc. said in a Jan. 26 note there were $550 billion of outflows in the second half of 2015, and that every 1 percent yuan weakening risks $100 billion more. Chinese companies’ total foreign-currency debt dropped by about $140 billion in the second half of 2015 to $1.69 trillion, including corporate borrowing from onshore banks, Goldman wrote in the note. China’s foreign exchange reserves shrank $99.5 billion in January, the second-biggest drop on record, to $3.23 trillion.

“The renminbi depreciation will lead to FX translation losses so it would be more popular for Chinese companies to lower their FX risk by calling back their offshore dollar debt,” said Ross Lee, credit analyst at Bank of China Hong Kong Ltd.

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