China asks firms to prepare for offshore bond repayments

Asia's Tech News Daily

China asks firms to prepare for offshore bond repayments

BEIJING (BLOOMBERG) – A top Chinese regulator called on companies to make “active preparations” to meet payments on their offshore bonds as the crisis at China Evergrande Group and other property developers threatens to roil the world’s second-largest economy.

The National Development and Reform Commission (NDRC), which oversees foreign debt issuance, also called on companies to “optimize their foreign debt structure” to raise funds, according to a statement following a meeting with key industries on Tuesday (Oct 26). The statement didn’t name companies.

The top economic planner said it will continue to meet firms’ “reasonable needs” for the rollover of foreign debt and repayment. The regulator urged companies to abide by “financial discipline and market rules,” and said they should prepare for the redemption of principal and interest on overseas bonds.

The move by the NDRC comes after concerns flared about the ability of lower-rated Chinese borrowers to roll over international borrowings following a surge in financing costs. Chinese junk-rated US dollar bond yields recently hit the highest in a decade at about 20 per cent, which contributed to the country’s developers making up nearly half the world’s distressed dollar notes.

“It shows the government’s attitude to rein in defaults of offshore dollar bonds,” asking companies to make every effort to service their debt, said Ting Meng, senior Asia credit strategist at ANZ Banking Group. Ms Meng expects “actual” actions to follow. “This is not enough, as refinancing is very hard given such high yields and high redemptions next year.”

China is trying to limit the fallout from Evergrande, the world’s most indebted developer that’s saddled with more than US$300 billion (S$404 billion) in liabilities. Creditors are still bracing for an eventual default and restructuring that could rank among the largest ever in China even after the developer made an unexpected coupon payment on a US$2 billion bond last week. Even after recent gains, Evergrande’s dollar note maturing in March trades below 30 cents on the dollar.

Chinese borrowers have defaulted on about US$9 billion of offshore bonds this year, with the real estate industry accounting for a third of that amount. That’s come as authorities clamp down on excessive leverage in the real estate sector amid a crisis at Evergrande that has left many investors around the world on edge.

The surprise default on a US$205.7 million bond by Fantasia Holdings Group this month spurred a dramatic sell-off in the offshore market, with some investors taking it as a harbinger of a worsening liquidity crisis for China’s heavily leveraged property firms. Sinic Holdings Group also defaulted last week.

Signs of stress in the real estate sector sharpened on Tuesday after Modern Land China failed to pay either the principal or interest on a US$250 million bond due Monday, according to a Singapore stock exchange filing. The company is working with its legal counsel, Sidley Austin LLP, and expects to engage independent financial advisers soon, the filing said. Fitch Ratings downgraded Modern Land to restricted default from C following the missed payment.

Chinese authorities meanwhile have told Evergrande’s billionaire founder Hui Ka Yan to use his personal wealth to alleviate the firm’s deepening debt crisis, according to people familiar with the matter.

Beijing’s directive to the Evergrande chairman came after his company missed an initial Sept 23 deadline for a coupon payment on a dollar bond, said the people, asking not to be identified discussing a private matter. Local governments across China are monitoring Evergrande’s bank accounts to ensure company cash is used to complete unfinished housing projects and not diverted to pay creditors, the people said.

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