2014-09-07

Falling Yuan Socks Debtors; Developers in the Crosshairs

China can't have a financial crisis because China doesn't borrow from foreigners. Except Chinese do borrow heavily from foreigners.

Yuan Takes Chinese Corporate Profits Down With It
Tencent Holdings Ltd. TCEHY -0.24% said in August that foreign-exchange losses were the main reason for a sharp jump in financing costs to 354 million yuan in the second quarter, compared with net financing income of 14 million yuan a year earlier. The Internet conglomerate in April completed a $2.5 billion bond sale in the U.S. Tencent's overall second-quarter profit rose 59% to 5.84 billion yuan. Tencent declined to comment for this article.

The numbers aren't going to cause a major crisis, but some industries are more at risk than others.

March 2014: Chinese developers seek alternative financing as investors grow wary
As of March 15, Chinese developers had issued 15 U.S. dollar bonds raising $7.1 billion so far this year, compared with 23 issues that raised $8.1 billion in the year-earlier period.

"That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital," said Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.

September 2014: China’s Property Slump Spurs Record Loans to Builders
Cash-strapped Chinese developers are borrowing a record amount in the offshore loan market this year, adding to the highest debt loads since 2005.

Homebuilders in the world’s second-largest economy got $5.9 billion from foreign banks, up 39 percent from the same period last year, according to data compiled by Bloomberg. Builder debt has soared to 128 percent of equity, the highest since 2005, according to a Bloomberg Intelligence gauge of 84 companies.

......“Higher leverage on the balance sheet will give developers a higher financial burden,” said Agnes Wong, credit strategist at Nomura Holdings Inc. in Hong Kong. “That means that if presales are not going as quick as they expect it can translate into trouble more easily than before.”

Chinese Property Developers' New Financing Tool Raises Red Flags
Chinese property developers are increasingly raising funds through a method that some analysts say makes their debt loads look lighter than they are.

......Among their advantages to issuers, they can be treated on the balance sheet as equity, or a hybrid of equity and debt, rather than debt. That is because the payments are made at the discretion of the company, so they are considered dividends rather than interest payments.

......Among the developers, analysts highlighted Guangzhou-based developer Evergrande as relying most heavily on perpetual securities. Evergrande's leverage would jump to 248% from 90% if the securities were classified as debt, Citi Research says.

Going back to the March 2014 article above:
Beijing Capital was the first Hong Kong-listed developer to issue dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.

Higher debt levels, hidden debt, and growing exposure to currency risk at precisely the wrong time. Looks like some good candidates for a short-seller.

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