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Wednesday, May 16, 2018, 15:59
China developers' reliance on short bonds hit 5-year high
By Bloomberg
Wednesday, May 16, 2018, 15:59 By Bloomberg

This July 18, 2003 file photo shows multiple 100 yuan notes in Beijing, China. (FREDERIC J BROWN / AFP)

Surging defaults among Chinese privately held companies are forcing property developers to think short term when it comes to domestic borrowings.

Yuan bonds with maturities of less than one year accounted for about 28 percent of total onshore issuance this quarter, data compiled by Bloomberg show, the highest level since 2012. Such short-term bonds totaling 13.7 billion yuan (US$2.2 billion) were sold by local developers in the period, the data show.

China has stepped up crackdown on shadow banking as part of a deleveraging campaign, a move that’s cut off a cash lifeline to property developers facing record debt maturities this year

Shorter-dated debt allows investors to minimize their exposure to potential defaults. Yet these securities give rise to other problems for issuers, like shorter bond repayment deadlines and a mismatch in debt and business projects.

“Investors’ demand for privately-held developers’ long-term bonds is weak after the recent surge in private-held companies’ bond defaults,” said Wang Ying, a senior director at Fitch Ratings in Shanghai. “For these developers, reducing debt maturities would increase refinancing risks, force them to change long-term expansion plans and make it more difficult to manage cash flows.”

China has stepped up crackdown on shadow banking as part of a deleveraging campaign, a move that’s cut off a cash lifeline to property developers facing record debt maturities this year. Smaller property firms might miss payments on bonds after the government’s leverage curbs pushed up borrowing costs, Neuberger Berman said last month.

Chinese companies face a surge in distressed events with at least two having defaulted on bonds and two others running into liquidity trouble in the past two weeks. The yield premium of five-year AA- rated bonds over AAA rated notes widened 41 basis points in April to 207 basis points, the biggest monthly jump in more than six years.

“The increase in short-term debt will raise refinancing risks,” said Christopher Lee, managing director of corporate ratings at S&P Global Ratings in Hong Kong. “Issuers may face a lot of bond redemption within a short period of time. Large supply will also make refinancing tougher as issuers compete for funding in a rising rate environment.”

At least 12 publicly-issued bonds have defaulted in the onshore market so far in 2018, compared with 13 in the year-ago period.

ALSO READ: Bond issuances set to surge this year on fiscal pressure

The fact that there is no sign the government will loosen property curbs also damps investor demand for property bonds, said Wang.

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