China’s Evergrande was supposed to scale back its towering debt pile this year, leading the country’s property sector in a much needed deleveraging. But a surge in US dollar borrowing has investors worried the burden will actually grow.
Local developers have doubled their US dollar bond issuance to $32bn since the start of the year, according to data from Dealogic, as they seek to refinance higher-cost and shorter-term debt.
Some investors have welcomed the wave of issuance as a sign the companies are focused on paying down more costly bonds onshore, where repayment pressure has mounted with Rmb267bn ($39.7bn) still to mature this year. Yet as China’s property market cools, there is a growing risk the sector will end up with unmanageable debt.
Evergrande is China’s most highly indebted property developer, owing a total of more than $100bn, while the industry faces a wall of more than $300bn in maturing debts in the next two-and-a-half years. With official concerns rising about unsustainable debt growth, a number of developers have pledged to reduce their overall leverage, led by Evergrande and its billionaire chairman Hui Ka Yan.
The company cut its debt by about Rmb70bn in 2018 and is aiming to chop another Rmb80bn this year, according to CreditSights. Its total debt to equity ratio fell to 219 per cent at the end of 2018, down from 303 per cent a year earlier, according to S&P Capital IQ.
Alaa Bushehri, head of emerging markets corporate debt at BNP Paribas Asset Management, said her company saw Evergrande’s leverage levels “remaining stable or even going down” over the next few years.
But the company has led this year’s charge into US dollar debt in Asia, raising $6.6bn as of mid-April — the most of any company in the region excluding Japan. Its total US dollar and renminbi-denominated debt stands at just over $100bn, according to S&P Capital IQ.
Demand for the company’s bonds has at times proved feeble, with Mr Hui in November forced to prop up a $1.8bn bond issuance with $1bn of his own money even after offering a high interest rate of 13.75 per cent on the notes.
Evergrande’s US dollar debt of about $18bn puts the country’s second-largest developer by sales in the top tier of the world’s most indebted private companies, according to Dealogic.
Among non-state-run groups in emerging markets, Evergrande has the seventh-highest outstanding dollar debt.
“There aren’t that many companies in the world with that much outstanding dollar debt,” said Paul Lukaszewski, head of Asian corporate debt and emerging markets credit research at Aberdeen Standard Investments.
Rivals Country Garden and Dalian Wanda, among China’s top five developers, are not far behind with $14.7bn and $13.9bn in dollar debt respectively.
Evergrande, Country Garden and other developers have justified their high leverage by citing the need to expand in what has often appeared to be a market with limitless demand for homes.
China’s politburo, the country’s highest decision-making body, sent a strong signal this week that regional housing controls, which hold back demand, were unlikely to be loosened. It said regulators would focus on curbing speculation, which has fuelled property market growth and high house prices over the past decade.
Analysts say that if developers do not move quickly to deleverage before a sharper downturn in the property market, they could be caught out with little ability to continue raising capital.
Chinese developers face a wall of $325bn in maturing debts by the end of 2021, most renminbi-denominated. US dollar maturities are set to peak at about $39bn in 2021, according to Dealogic.
“The risk is for developers with high gearing not to use this opportunity for deleveraging before the market cools” even further, said Philip Zhong, a property analyst at Morningstar.
Otherwise, the combination of a slowdown in mainland China and a build-up in dollar debt threatens to end badly for some developers, economists say.
Repaying US dollar bonds could become a problem in the event of strong currency outflows from China, said Kevin Lai, Daiwa Capital Markets chief economist for Asia excluding Japan.
Beijing carefully controls its capital account and guards against outflows that put downward pressure on the renminbi. The inflows from developers that are using US dollar bonds to pay off renminbi debt have boosted demand for the country’s currency, so have been encouraged by China’s foreign exchange watchdog.
But paying interest and principal on the offshore debt could prove much more difficult.
“They will have trouble converting it back because that will put a lot of pressure on the currency,” Mr Lai said. “The only solution for them is to keep borrowing more and more [offshore] every year. But they can’t go on like that forever.”