When the National Development and Reform Commission (NDRC) introduced its new process for borrowers seeking offshore debt in 2015, it was meant to make life easier. The new system allows issuers simply to register and sell bonds up to an agreed cap, as and when they choose during the year. Before then, issuers wanting to go offshore were required to receive official NDRC approval on a case-by-case basis for each bond.
But the process seems to have changed in name only, as issuers face weeks of waiting until their registration paperwork is processed and they’re free to proceed. This year, investment bankers and issuers have reported that registration times seem to be lengthening for many, without clear guidance on the reasons why. What used to mean a wait of weeks, has now turned into months due to stalling by the NDRC.
Unsurprisingly, there has been no official statement about a change of policy. But the ambiguities are leaving issuers confused and concerned about how much funding they’ll be able to complete this year, raising questions for those with pressing refinancing needs.
High yield issuers have even more to worry about than their investment grade counterparts. The Shenzhen unit of the NDRC announced in March that it would be requiring investment grade ratings from companies wanting to sell bonds offshore. High yield names won’t be explicitly barred, but the Shenzhen message was clear that they may as well be. Right now, the move is concentrated in Shenzhen, but as NDRC is the national regulator, there are valid fears that the high yield restriction could spread if Shenzhen is being used as a pilot programme.
Such a move would be devastating for Chinese issuers. There is known to be large refinancing needs this year, particularly from high yield property companies. Domestic fundraising restrictions on property names and the need for dollars have these issuers desperate to go offshore. Last fall, regulators began to limit property developer’s equity and bond sales as part of efforts to cool the property market. The Securities Association of China is said to be revising rules to restrict property developer’s access to issue private placement bonds.
And issuers are eager to come to market now because the market backdrop is strong. And this is unlikely to last with market participants are anticipating at least one more interest rate rise this year and global instability likely to regularly give markets the jitters.
Should issuers find themselves only getting the NDRC go-ahead in the second half of the year, they may be forced to go to market when conditions are less than ideal, especially if they have a lot raise. Even Country Garden, a well-known and liked high yield property name, was forced to pull its deal in November when investors refused to bite, citing “uncertain market conditions” following the election of Donald Trump.
NDRC still has time to make it good promises. With no formal restrictions in place, China could easily change its approach this year. At the very least, providing some more transparency about the registration process could calm issuers and reset expectations. In the meantime, it’s recommended that issuers register with the NDRC early and keep their fingers crossed.