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Strains Emerge as China’s Dollar Debt Piles Up
Evergrande’s 6.6 billion dollars of dollar-denominated debt is trading below face value days after sale
By Saumya Vaishampayan
Updated June 26, 2017 9:04 a.m. ET
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A fall in the price of bonds issued by China’s largest property developer last week is adding to strains in the market even as Chinese companies continue to pile up a mountain of dollar-denominated debt this year.
China Evergrande last week sold bonds worth 6.6 billion dollars in total, the largest issuance by an Asian high-yield company ever, according to Dealogic. The company issued 3.8 billion dollars of new debt and exchanged 2.8 billion dollars of old bonds into new debt, paying coupons of up to 8.75%.
Evergrande’s bond deal comes on top of a dizzying amount of dollar-bond issuance by Chinese companies this year. Collectively, they have sold about 90.5 billion dollars in dollar debt, nearly as much as the 102.8 billion dollars issued in all of 2016 and already more than the 84.8 billion dollars issued in 2015, according to Dealogic. The year-to-date issuance is a record this century, based on Dealogic data.
Alongside the surge, Chinese regulators have in recent months tightened scrutiny over companies wishing to issue bonds overseas. The Wall Street Journal reported last week that China’s banking regulator is checking the borrowings of some of the country’s biggest overseas deal makers, including property giant Dalian Wanda Group. The offshore bonds of many of those companies were hit hard last week, according to research firm CreditSights.
Market participants said the fall in Evergrande’s bonds appeared to be mostly due to a large amount of bonds being allocated to buyers. Investors often place larger orders for new bond issues than they want to receive, because they don’t expect to get the full amount of their order.
“The price reaction was predominantly because of the very large volume,” said Rick Mattila, international head of market strategy at MUFG Securities Asia Ltd. in Hong Kong. “Investors ended up with more bonds than they would have perhaps liked.”
Evergrande couldn’t be reached for comment.
Chinese companies have turned to offshore markets for funding in recent months as Beijing takes steps to bring down the country’s lofty debt levels. Rising yields in China’s government-bond market have made it more expensive for Chinese companies to borrow onshore, since investors generally demand even-higher yields to own corporate bonds because of the risk of default.
Falling U.S. Treasury yields have made it more attractive for Chinese companies to issue U.S. dollar debt. The yield on the 10-year Chinese government bond has risen to 3.566% on Monday in Hong Kong from 3.07% at the end of 2016, while the 10-year U.S. Treasury yield has fallen to about 2.135% from 2.43% in the same period, according to Thomson Reuters data.
“One consequence of the deleveraging campaign by the [Chinese] government: Companies have been able to borrow more cheaply offshore than onshore,” said Teresa Kong, a portfolio manager at Matthews Asia in San Francisco, adding that she owns some dollar-denominated debt issued by Chinese companies.
Much of that dollar debt is being snapped up by Chinese investors who have stashed dollars away offshore, and are familiar with the companies raising debt, market participants say.
Some say investors could now become more choosy about dollar debt issued by Chinese companies. “For high-quality names, the appetite is still there,” said Ben Sy, head of fixed income, currencies and commodities at J.P. Morgan Private Bank in Hong Kong.
The boom has caught the Chinese authorities’ attention. The National Development and Reform Commission, the country’s economic planning ministry, has required most Chinese companies to register their plans to issue offshore bonds since September 2015. That has operated more like an approval process recently, market participants say.
In recent months, the NDRC has cracked down on foreign-debt issuance by property companies and financing vehicles linked to local governments, according to Ying Wang, a senior director at Fitch Ratings in China. On June 12, the ministry issued a statement naming companies that hadn’t complied with registration requirements, and warned others from doing the same.
Still, if the debt has a maturity of less than one year, it doesn’t need such approval for issuance, according to the NDRC’s official rules from 2015.
Some Chinese companies have recently issued bonds with maturities just shy of one year—including by just a day. Fantasia Holdings Group Co. Ltd., which focuses on property, this month issued 364-day notes that pay a coupon of 5.5%. Also in June, Hainan Airlines Hong Kong Co. Ltd. issued 364-day U.S. dollar senior notes that pay a coupon of 5.5%, and Greenland Global Investment Ltd. issued 363-day U.S. dollar senior notes that pay a coupon of 4%.
Some analysts are warning investors to be careful of such bonds.
“I am generally a bit of a skeptic on this,” said Harsh Agarwal, head of Asia credit research at Deutsche Bank. “If this avenue closes down, you have to be sure that the company can repay the bond.”
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