Xinyuan Chairman Zhang Yong
On 28th January, NYSE-listed Xinyuan Real Estate (XIN) became the second Chinese property developer this year to ask bondholders to allow renegotiation of the debt terms, apparently so that the companies can take on more leverage as credit dries up in China.
Xinyuan’s move to amend the terms of its 13.25 percent senior notes due 2018 followed a similar move during January by Evergrande Real Estate, as the developers take advantage of a market which is eager to buy their debt, and seemingly unconcerned about potential renegotiation of terms after the original sale.
Forced into the overseas credit markets by tightened loan conditions within China, the country’s developers are the biggest issuers of high-yield bonds in the region. During January, mainland-focused real estate firms sold US$6 billion of US dollar bonds to overseas investors.
Last year, the sector issued about US$24 billion of debt offshore.
In Xinyuan’s case, the company is asking current holders of its bonds to allow the company to take on more leverage than was specified when the notes were originally issued. In the original covenants, the company was limited to raising up to 20 percent of its total asset value as debt. The terms under renegotiation would raise the limit to 30 percent. The debt currently being issued by the company already specifies the 30 percent standard.
For Evergrande, its renegotiated bonds not only raised the company’s debt limit, but also specified other changes that, according to a recent Reuters report, “could allow Evergrande, which recently took a big stake in a Chinese bank, to add some US$2bn more debt to its balance sheet.”
Possible Downgrade for China Developer Debt
The eagerness among China’s developers to take on more debt appears to have already caught the eye of rating agencies. Credit firm S&P put Evergrande’s BB rating on a watch list late last month. Commenting on Evergrande’s status, S&P analyst Matthew Kong wrote,
We placed the ratings on CreditWatch because Evergrande’s financial strength will likely weaken more than we earlier expected. The likely deterioration follows the company’s recent acquisition of shares in China’s Huaxia Bank and large land acquisitions in recent months.
While many property developers are able to quickly take debt off the books by selling unfinished residential units to individual buyers, any moves to shift toward commercial real estate development, or slowdowns in home sales could put more heavily leveraged firms under pressure.
As the mainland seeks to avoid risks associated with a property bubble, the government has already started to rein in shadow banking and cap local government debt growth. These moves have helped move the country’s developers into offshore debt markets, where investors are apparently less concerned over the possibility of defaults than are the local authorities in China.
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