China developers menaced by $38bn in bond puts
September 19 2017 10:08 PM
Women walk in front of a housing complex in Shanghai. Chinese property developers face a wall of local bonds that investors can force them to pay off next year ahead of schedule, just as rising interest rates raise the risk that more note holders may opt to do so.


Chinese property developers face a wall of local bonds that investors can force them to pay off next year ahead of schedule, just as rising interest rates raise the risk that more note holders may opt to do so.
Investors have an option to offload 250bn yuan ($38bn) of such notes in 2018, according to Bloomberg data. To put some perspective on that amount, it’s five times all their regularly maturing onshore bond principal this year.
As China’s government pushes companies to trim excessive borrowing, financing costs in the nation’s credit markets have jumped this year. That’s left about 72% of the 137 local real estate bonds with put options that can be exercised next year in the money, meaning their current secondary-market yields are higher than coupon rates, according to Bloomberg-compiled data based on Chinabond valuations. That boosts the likelihood that holders will demand early repayment, a particular concern for lower-rated issuers.
“The put options coming due next year may have a bigger impact on smaller and weaker developers,” said Tony Chen, a credit desk analyst in Hong Kong at Nomura Holdings. “The domestic funding environment may get even tighter next year for developers. While most developers should be fine in terms of liquidity, the weakest may face increasing pressure.”
There have already been increasing signs that real estate companies will need to pay more for money, adding to strains from home-buying curbs across the country that saw prices rise in fewer cities in August.
An offering of a puttable bond earlier this month illustrates the trend. Times Property Holdings, based in the southern city of Guangzhou, sold five-year securities at the highest coupon in almost three years for similar-maturity property notes with put options. The firm also said it expects borrowing costs to rise further.
The developer issued the 1.1bn yuan of five-year AA rated notes in a private placement to yield 8.2% on September 8, it said in a stock exchange filing last week. 
The last time a Chinese real estate firm sold similar securities with a higher coupon was in 2014, according to data compiled by Bloomberg.
“As the general funding environment will continue to tighten, we estimate borrowing costs will rise even higher,” Times Property said in a statement responding to questions from Bloomberg News. The coupon was within a reasonable range, the firm said.
China’s developers have been actively buying land, and there are signs of tight funding, according to a China International Capital Corp report last week based on analysis of listed companies’ first-half reports.
China-listed property developers’ total cash and cash equivalents were 826bn yuan as of June 30, compared with 866bn yuan at the end of the first quarter, according to Bloomberg-compiled data.
New-home prices, excluding government-subsidised housing, gained in 46 of 70 cities tracked by the government in August, compared with 56 in July, the National Bureau of Statistics said on Monday. That was the smallest number of increases since January.
“The market thinks property bonds’ credit risks are rising,” said Jiang Xiaoli, a fund manager at Tianhong Asset Management Co in Beijing. “Sales growth is slowing and there are more and more financing restrictions. We don’t consider property bonds lower than AA+.”
Chinese developers will also face 107bn yuan of maturing bond principal next year, Bloomberg-compiled data show. 
On top of that, the amount of notes on which investors have a put option will rise to 260bn yuan in 2019.
“Chinese property developers will be under more refinancing pressure next year,” said Nomura’s Chen. “The issuers will either need to prepare for the possible repayment or lure bondholders to stay by offering a higher coupon rate. Either way will raise their financing costs.”

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