China Evergrande Issues Another $3B in Bonds as Debt Pile Grows

China Evergrande Group, the mainland’s most indebted developer, announced on Tuesday that it will conduct a further international offering of $3 billion in senior notes in what has been Asia’s biggest offshore high-yield bond sale so far this year.

The issuance of these additional notes, which came two months after the Shenzhen-based home builder sold $1 billion in bonds at an 11 percent interest rate, were part of a bid “for refinancing of existing indebtedness with the remainder for general corporate purpose,” according to the company’s filing to the Hong Kong Stock Exchange.

Everygrande is China’s second-largest property developer by sales and has been under pressure to raise funds to cut its large debt pile, which stood at RMB 671.1 billion ($98.88 billion) as of June 2018, Reuters reported.

Merging New Notes With Existing Paper

The company’s debt offering was accomplished through a reopening of $2.1 billion in existing bonds, effectively merging three new sets of notes with earlier bond issues by Evergrande.

The latest sale includes a $1.1 billion tranche maturing in 2020 issued at seven percent interest rates, which are to be consolidated and form a single series with Evergrande’s $500 million senior notes issued on March 23, 2017. An $875 million tranche issued at 6.25 percent interest rates, which will come due in 2021, are likewise to be consolidated and form a single series with the developer’s $598.18 million in senior notes issued on June 28, 2017. A third tranche of $1.025 billion in bonds issued at 8.25 percent will come due in 2022 and are being consolidated to form a single series with Evergrande’s existing $1 billion in senior notes issued on March 23, 2017.

Evergrande surprised the bond market last October by selling three tranches of senior notes worth $1.8 billion with interest rates up to 13.75 percent. Three weeks later it sold another $1 billion due in 2020, with the new paper carrying 11 percent interest rates.

Liquidity Clampdown Squeezes Mainland Developers

Chinese developers have been caught in a tightening funding squeeze for the past year, as Beijing pushes forward a deleveraging campaign to reduce the country’s total debt and rein in an overheated property market. The restrictions on lending by China’s domestic banks appears set to stay despite the sector facing a record $62 billion of bonds due in both onshore and offshore markets in 2019, an amount roughly double value of bonds which matured in 2018.

The funding restrictions, combined with slowing home sales, have made the country’s home builders active players in both onshore and offshore bond markets in the past few weeks.

Shimao China announced on January 13th that it is issuing RMB 2 billion in bonds at 4.65 percent interest rates due in 2022, while Sunac China on January 10 conducted an offering of $600 million in senior notes at 8.375 percent which will come due in 2021. On January 17th, R&F Group completed the issuance of RMB 1.3 billion in short term bonds (due in 270 days) at 5.28 percent, while China SCE group on January 15th sold $500 million in senior notes due in 2021 at 8.75 percent.

Mainland Developer Debt Issues Surge in 2019

Based on data from financial information provider Refinitiv, Evergrande’s latest debt issue would bring total US dollar bond issues by mainland property developers to $7.2 billion so far this year, compared to the $18.8 billion in offshore bonds they sold in all of 2018.

Last December, the National Development and Reform Commission released a notice on supporting direct fund raising initiatives by “quality enterprises” to further strengthen the ability of corporate bonds to serve the real economy. The central government planning body said it would support the fund raising of Chinese developers whose assets are RMB150 billion and above, sales revenue more than RMB30 billion and a debt ratio under 85 percent. The move was seen as a signal for some relaxation on funding.

Credit rating agency Fitch noted in its 2019 China Real Estate Credit Outlook, published last month, that the top 20 Chinese developers will maintain some growth in sales revenue and land reserves under the condition that they keep leverage in check and sustain liquidity. For smaller mainland builders, however, they are likely to face increasing capital pressure and may be forced to sell existing projects to bigger players under the current financial environment.