2014-04-28

Developers Turn to Perpetual Debt

Chinese Developers Tap Alternative Funding
The central government— treading a fine line between reining in rising property prices and addressing off-balance sheet problems— has stepped in with measures to clamp down on the availability of bank lending.

However, mainland regulators on March 19 allowed two Chinese developers — Tianjin Tianbao Infrastructure and Join In Holding — to issue new A-share stock sales in the form of private placements, opening up a fundraising avenue that has been closed for almost four years.

Although this is viewed by analysts as a positive step as it opens up an alternative route for the sector, Daiwa's China property analyst Felix Lam believes that the Chinese Securities Regulatory Commission will be very selective in extending stock sale approvals.

"CSRC will need to filter out those developers that really need the money for developments and those that would use to the money to do something else," he said.

......"Bond financing it is much preferred as is cheaper, and it's able to provide adequate size and tenor." As such, Chinese developers have seized the opportunity to lengthen tenors by issuing perpetual notes, with the latest being Greentown China.

The real estate company raised a $500 million perpetual bond in January at a coupon of 9%, and is the fifth ever Chinese developer to do so, according to Dealogic data.


But real estate borrowers will be taking a more cautious or "watch-and-see" approach to issuing on the back of an increasingly volatile backdrop thanks to current industry headwinds, as well as ongoing Fed tapering concerns and rising tensions between Russia and Ukraine, say debt bankers.


Perpetual bonds arrive in China
Under International Financial Reporting Standards, perpetual bonds count as equity as long as they do not have a set maturity and the call is an option of the issuer.

However, according to two sources, the proposed perpetual MTNs will still be counted as debt, instead of equity, on China Merchants' balance sheet. China Chengxin International Credit Rating has rated the issuer and the bonds at AAA.

Without the benefit of equity treatment, companies will have few reasons to issue perpetual bonds other than the greater flexibility that comes with the lack of a fixed maturity. They are also likely to cost more relative to selling standard five-year MTNs.

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