CapitaMalls Asia is facing hurdles when trying to get financing in China, arguing that Chinese banks rarely price renminbi-denominated loans according to the creditworthiness of corporates. This makes it difficult for businesses with strong balance sheets to obtain competitively priced funding.
The Singapore-based property developer says the maximum discount the company can obtain over the People’s Bank of China (PBoC) rate is 20%, says chief financial officer Kok Siong Ng.
Currently, PBoC’s commercial base lending rate for renminbi loans with loan tenors of between three to five years is at 6.4%, according to data from HSBC Bank (China).
“Fund availability is not the biggest obstacle. The biggest disadvantage is the pricing of the loan in terms of credit margin. [Banks] do very little to differentiate a good borrower versus a bad borrower,” said Ng to Asiamoney PLUS in a telephone interview on May 8. “By setting a range bound discount to premium that basically minimises the bank’s ability to assess creditworthiness professionally.”
“Despite the fact that our cash flow and business has very high visibility and very low beta, we do not seem to be able to enjoy a stronger or narrower credit spread vis-à-vis with another company with a weaker cash flow.”
The lending and deposit rates for China – of around 6.31% and 3.25% respectively – are allowed to fluctuate within a narrow band. Banks will be allowed to raise the ceiling of their deposit rates to 1.1 times the set deposit rate, while they can drop their lending rate to 0.8 times the official lending rate.
The nature of CapitaMalls business could be one reason to why Chinese banks might be reluctant to lower lending rates, notes Choon Yeow Foo, head of corporate finance, treasury at the company.
“In our case it is even more restricted because of the industry that we are in. We can’t get financing for land, for any construction. They need to proof that this is the bill or invoice from your contractors before we can actually go to the bank and for any application for a loan, you need to have your own title on the building first before you can actually use that to pay the contractors,” said Foo.
China’s central government has been fairly persistent in its efforts to rein in home prices over the last few years. This is because the average price of homes has climbed 150% between 2003 and 2012.
Despite these lending difficulties, CapitaMalls has come to terms with the restrictions and regulations imposed on the property sector. The fact that the company has established a holding company structure onshore – in the form of a special purposes vehicle (SPV) – makes it easier for it to access the domestic bank lending sector.
“That is something we can’t really change as long as we are using the [local] banks,” said Foo. “The good thing is that we have been in the industry long enough and they are lending to us. The mechanism is something that people on the ground are fairly familiar with once they are able to obtain the relevant documents on the drawdown of the loan.”
Multinational corproates (MNCs) that have an SPV established in China will benefit from favourable tax treatments.
While fairly challenging to obtain a renminbi-denominated loan onshore, the situation offshore is not necessarily any better. This is not restricted to Hong Kong, but also Singapore and other markets outside China, notes CapitaMalls.
This is due to the Mainland’s capital account restrictions that make it difficult for corporates in general to inject cash into the country.
“If we want to tap [the offshore market], I think we can do it. But the question is always injecting it back onshore. There is some restriction,” said Foo.
As a result, profits that are generated onshore – if and when are necessary – will be ploughed back into CapitaMall’s China business.
“There is a real issue of cash trapped in China, especially if you don’t assume that you want to reinvest and grow the company,” said Ng. “Overall as a group, we are still expanding. So we are a net cash inflow vehicle. We don’t see ourselves seeing a lot of cash sitting around as a matter of fact, China remains our primary investment structure.”
CapitaMalls Asia (China) has a diversified portfolio of 60 shopping malls across 36 cities, with a total property value of approximately SGD14 billion (US$11.3 billion) and a total gross floor area (GFA) of approximately 6.26 million square metres.
The company’s landmark shopping malls are CapitaMall Crystal in Beijing; Hongkou Plaza in Shanghai and Raffles City Shanghai; and CapitaMall Jinniu in Chengdu.