Chinese property investors on shakier ground

Thu Jan 30, 2014 4:38am EST

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* Companies pushing for looser covenants on high-yield bonds

* Terms allow some developers to take on more debt

* Investors offer little resistance despite moves to weaken protection

By Neha D'Silva

HONG KONG,Jan 30 (IFR) - Chinese property developers are becoming increasingly bold in their bid to issue debt with looser terms, in some cases giving themselves the flexibility to take on more debt.

Following the lead of Evergrande Real Estate Group, Xinyuan Real Estate has asked holders of its outstanding bonds to agree to looser bond covenants.

The trend towards weaker investor protection has a bearing on the wider Asian credit market, as China's property developers are the biggest issuers of high-yield bonds in the region. In January alone, Chinese developers sold US$6bn of US dollar bonds to overseas investors. Last year, the sector issued about US$24bn of debt offshore.

"The covenant quality for Chinese property issuers has weakened, and we expect it to be a trend because of the recent demand seen for Chinese developers' bonds," said Franco Leung, a corporate finance analyst at Moody's.

Evergrande, rated B1/BB/BB, and Xinyuan, rated B+/B+, are seeking to align the terms of these older bonds with those of newly-issued securities. Evergrande, for example, won investor approval this month to align its 13% 2015 dollar-denominated bonds and 9.25% 2016 renminbi-denominated bonds with those of a 8.75% bond due in 2018 issued in October.

Among several changes, Evergrande asked bondholders to lower the company's minimum fixed-charge coverage ratio to 2.75 from 3.50, in line with the new 2018 bonds. The ratio describes a company's ability to pay fixed expenses from its annual earnings.

Such a move may allow Evergrande, which recently took a big stake in a Chinese bank, to add some US$2bn more debt to its balance sheet, according to one banker.

A fixed-charge coverage ratio of 3.5 to 4 was the norm in earlier offshore bond issues from the sector, but now most are set at 2.75 to 3, even for lower-rated, Single B Chinese property names.

Evergrande's move was followed by Xinyuan, which is seeking consent to amend the terms of its 13.25% notes due 2018.

Unlike Evergrande, Xinyuan is not touching the fixed-charge coverage ratio. It is, however, asking to be able to increase the amount of debt it can raise to 30% of assets. The same language is in the covenants of its newer bonds, a change from the 20% limit set in the bonds due in 2018.

Xinyuan is also requesting more freedom to acquire businesses or to increase debt in its subsidiaries. 'LESS CONCERNED'

Banks involved in the exercises argue the companies are simply aligning the terms of these bonds to reflect the new reality for the property sector.

But, say, investors, that new reality is exactly the problem.

"Every new bond is a bit looser, and then everyone follows from that new gauge," said one portfolio manager.

Rating agencies are concerned about the additional leverage, too. Standard & Poor's placed Evergrande's BB rating on CreditWatch Negative January 27.

"We placed the ratings on CreditWatch because Evergrande's financial strength will likely weaken more than we earlier expected," Matthew Kong, an S&P credit analyst said in the report. "The likely deterioration follows the company's recent acquisition of shares in China's Huaxia Bank and large land acquisitions in recent months."

According to S&P, Evergrande's recent large acquisitions may push its leverage beyond the ratings agency's threshold for a downgrade.

The covenant changes, however, have yet to scare investors away from the sector.

"Investors in Asia are less conscious about these covenant structures than those in Europe or the US, which is the reason why they seem less concerned about leverage," said a Hong Kong-based syndicate banker.

"Property companies are turning around developments fast, which means there will be a lesser requirement for them to borrow very often for land acquisition," said a high yield portfolio manager.

Bigger institutional investors are starting to take notice and may start pushing back.

If they do not, however, one credit analyst suggested, property companies will continue to try and make the terms on their public debt looser. (Reporting By Neha D'Silva; editing by Abby Schultz and Steve Garton)

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