Reuters: US Dollar Report: Chinese developers turn to offshore loans as trust market seizes

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Chinese developers turn to offshore loans as trust market seizes Aug 6th 2013, 04:27 Tue Aug 6, 2013 12:27am EDT * At least 10 companies agreed overseas loans in July * Property-related trust products fell 63% last month * Offshore bank liquidity eases concerns of funding crunch By Nethelie Wong HONG KONG, Aug 6 (IFR) - A clampdown on local non-bank lending is driving more Chinese property companies to the offshore loan market. July was one of the busiest months on record for international loans to the capital-intensive Chinese property sector, with at least 10 sizable financings completed. That, analysts say, marks an accelerating trend for borrowers in the capital-intensive sector to look beyond the mainland funding markets. "Regulatory scrutiny of trust loan financing could make it [onshore funding] more difficult to obtain," said Bei Fu, an analyst at Standard & Poor's. "Most developers we rate have reduced their exposure to costly trust financing in the past 12 months through lower-cost offshore funding in bonds and syndicated loans." China has restricted domestic banks from lending to property companies in recent years in an effort to cool property prices, while developers have not been allowed to list, refinance or restructure in the domestic equity markets since 2010. With those conditions unchanged, the sudden return of appetite for overseas loans signals that a regulatory crackdown on the burgeoning market for renminbi trust loans has reduced onshore liquidity and pushed more issuers abroad. China's trust market recorded only 296 products for Rmb26bn (US$4.2bn) in July, a 27% drop in the number of products and a 57% tumble from the total amount raised the previous month. Of the total, only 29 were property-related trusts for Rmb4.258bn, down 45% in number and 63% in volume, according to Wind Data. Property-related trusts typically invest in the debt portions of development projects. Trust products have been an important alternative to bank lending in China. Their funding often comes from wealth management products that are distributed to financial institutions' high-net-worth clients, and a requirement for banks to register all wealth products as part of a clampdown on off-balance sheet lending has had a big impact on the sector. OFFSHORE LIQUIDITY The pick-up in offshore loans is also a result of tighter credit conditions in the international bond markets, until recently the favoured source of funding for Chinese developers. A spike in Treasury yields since the US Federal Reserve revealed plans to scale back its stimulus programme has undermined the appetite of foreign investors for dollar bonds of Chinese property companies. Yields on US dollar Chinese property bonds have gone up higher than rates in the loan market. Before Poly Property Group reopened the market on July 29, the last PRC property bond was Central China Real Estate's US$400m five-year in late May. Central China priced at 6.5% and was quoted at 8.11% in secondary on July 31, which translates into a 6.5% drop in the bond price. Comparatively, loan market liquidity is ample in both US and Hong Kong dollars. Among others, Longfor closed a HK$7.672bn-equivalent (US$983m) five-year club loan in mid-July. The loan was the largest ever for a Chinese developer and priced at Hibor plus 380bp all-in, which would translate into an initial yield of 4.14%. Meanwhile, Longfor's recently issued US dollar bonds due 2019 are yielding 6.875%. Sunac Greentown Investment Holdings, a Shanghai joint venture between Sunac and Greentown, obtained a US$400m three-year loan in late July from five banks. Greentown itself closed a US$100m three-year facility at Libor plus 400bp around the same time. Elsewhere, Yue Xiu Enterprise (Holdings) increased its three-year term loan to US$280m from US$150m, while Agile Property Holdings exercised a HK$1.65bn (US$213m) greenshoe on its three-year amortising facility, increasing it from HK$1.482bn. That shows that the international bank market is stepping up at a time when offshore bonds are becoming more expensive. "It is quite positive for the bonds," said one credit analyst in Singapore. "These companies before could not get loans offshore, now they can, and that reassures investors about their liquidity." ACTIVE IN HONG KONG The rise in dollar loans comes at the same time as Hong Kong banks are facing slowing demand for mortgage lending in their home market. Residential mortgages loans drawn in June dropped 11.3% compared with May to HK$12.8bn (US$1.65bn), and 36.6% compared with the same month in 2012, reflecting government measures to cool the city's property market. As they shift money away from mortgage lending, loan market liquidity is ample in Hong Kong, in US dollars or Hong Kong dollars, and Chinese property companies have been looking to take advantage. "We expect this trend to continue for other developers as Chinese banks become more active in the syndicated loan market in Hong Kong," said Fu. Link this Share this Digg this Email Reprints

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