* Analysts worry about currency mismatch of debt and
* Sector sold record amount of foreign debt since 2012
* Depreciation could trigger bond covenants, result in
By Christopher Langner
SINGAPORE, March 6 (IFR) - The recent volatility in the
Chinese currency has rekindled fears over the growing exposure
of mainland property developers to overseas debt.
In the past two years alone, Chinese developers have issued
US$40bn in foreign currency bonds, the result of a combination
of onshore lending restrictions and low US dollar interest
rates. The China property sector now accounts for some 40% of
Asia's two biggest high-yield debt benchmarks, the Merrill Lynch
and the JP Morgan Asian Credit indices.
Chinese borrowers have enjoyed an additional benefit of
borrowing overseas, as exchange rates have moved in their
favour. However, the recent reversal in the renminbi has raised
concerns over the rapid growth of unhedged foreign exchange
liabilities for companies that generate all their income in
Analysts are warning the overseas borrowing binge has become
unsustainable. In a report published on Thursday, Standard &
Poor's warned that sales revenues from the sector were no longer
growing as fast as liabilities.
"Our ratings on these developers may face downward pressure
as their debt increases may have outpaced property sales
growth," said Standard & Poor's credit analyst Matthew Kong,
referring to companies rated by the agency.
The renminbi has reversed course since touching a record
high of 6.0395 against the US dollar on January 14, and slipped
more than 1% in seven days to 6.1718 on February 28. It has
since rebounded to 6.1105, but the spike in volatility poses
challenges for Chinese companies with foreign exchange
Between January 1 2012 and the same date this year, the
renminbi appreciated 4.7%, effectively reducing the total
liabilities of Chinese developers in their home currency and
making it easier for them to meet interest payments.
As an example, in their mid-year reports last year, Agile
Property Holdings reported a gain of Rmb348m (US$57m) from the
effect of currency appreciation on its outstanding debt. China
Overseas Land Investments recorded a HK$360.4m (US$46.8m) net
foreign exchange gain.
It is no coincidence that these two companies are among the
Chinese developers with the biggest exposure to foreign currency
According to analysts at Credit Suisse, China Overseas Land
Investments tops the list with 87.2% of its debt in foreign
currencies, followed by China Resources Land, with 74.4%, and
Soho China, with 67.2%. Kaisa Group and Agile Property are in
the fifth and sixth position respectively, right after China
Overseas Grand Oceans, with 60% and 56.6%, while Cogo has 63%.
Because of its high exposure to dollar-denominated debt,
Credit Suisse calculated that a 5% depreciation in the renminbi
could increase the net gearing of China Overseas Land
Investments by 28%. The increase for Agile and Kaisa, two of the
most frequent offshore bond issuers, is much worse: 104% and
Credit Suisse's piece also raised the alarm among investors
and analysts over another issue: interest coverage.
Almost every single overseas bond from the Chinese property
sector includes a limit on the fixed charge coverage ratio,
which measures the number of times a company can meet its
interest expenses through earnings and recurring income such as
rental revenues. Such a clause is considered standard in the
high-yield bond market.
"The depreciation of the currency could impact the fixed
charge coverage ratio of these companies," said one high-yield
Recent bond issues have come with lower ratios, giving
developers more flexibility but eroding investors' protection.
Evergrande, for one, recently amended the terms on its
outstanding debt to reduce the fixed charge coverage ratio to
Others, however, may already be nearing their limits,
suggesting that any further depreciation in the renminbi could
have a big impact. A traditional approach to calculating fixed
charge coverage yielded a ratio of 2.91x for Kaisa Group, based
on the company's full-year earnings report, released last
Kaisa's outstanding 8.875% dollar bonds due on March 19 2018
require the company to maintain a minimum coverage ratio of 3x.
The covenants, however, require different calculations that
usually yield higher ratios. Jim Cheung, Kaisa Group CFO,
confirmed in an email that the company's fixed charge coverage
ratio was above 3x as of 31 December 2013.
"It is very difficult to calculate the FCCR of a PRC
property issuer based on only public information," he said.
Cheung also stressed that falling below the threshold would not
trigger an event of default.
"Even in case a company's FCCR is below 3x, it does not
necessarily mean the company is in breach of covenants under
most, if not all high-yield indentures in the PRC property
sector. It's an incurrence test instead of a maintenance test
concept," he said. "Kaisa has adequate headroom in terms of debt
incurrence to support its business expansion."
While analysts and portfolio managers agree that a more
volatile renminbi could impact the interest coverage of Chinese
developers, they do not expect the effects of the most recent
currency move to have a material impact on income statements.
One analyst noted that most of the companies in the sector
are reporting earnings this month for the period ended December
31, at which point the renminbi was traded at 6.056 to the
dollar, a record high.
"By the time they report mid-year earnings, the renminbi
will have appreciated again," he said.
(Reporting By Christopher Langner; editing by Steve Garton)