* 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
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
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
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.
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
"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
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
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