364 day bonds is no easy fix for NDRC headache
Fantasia Holdings Group Co surprised markets last week with a 364 day bond, opting for a short-term note to circumvent delays in offshore funding approval from the Chinese regulator. At first glance, the notes appear to offer a quick solution for property companies with looming funding requirements — but borrowers should take a closer look at the many disadvantages that come with such short term deals.
In China, most companies looking to sell foreign currency or offshore renminbi bonds with tenors longer than one year need to register their plans with the National Development and Reform Commission (NDRC) for each deal.
The registration process replaced the case-by-case approval system that was in place until September 2015, and was a way to simplify the process and relax restrictions around going offshore.
Or that was the idea. This year, many borrowers — particularly real estate developers — have found it difficult to secure approval to sell international bonds, forcing the likes of Fantasia and Greenland Holding Group to sell 364 day bonds to sidestep the system.
Of course, finding loopholes around regulatory hurdles is nothing new but other developers contemplating short-term bonds will be merely solving the symptoms but not tackling the root cause. For starters, while the funds do help out firms in desperate need for money, or facing an imminent refinancing, it comes at a cost. In the case of Fantasia, the developer paid 25.5bp over its secondary levels for the new $350m 5.5% notes.
And that was excluding other fees. As most developers do not have MTN programmes, the transaction, legal and documentation fees, as well as other expenses per exercise, can add up if companies were to issue or refinance these bonds, said market watchers.
Short-term notes also do not help with companies’ debt maturity profiles. According to market participants, issuers will likely create lumpy repayment profiles and a surge in refinancing risk from multiple bonds coming due around the same time one or two years down the road.
In addition, as it takes about two to three years to complete a real estate project in China, the consequences can be dire if the country’s real estate market collapses, issuers face problems with their cashflow, or if the credit market is under stress at the time of redemption.
Admittedly, the cashflows and revenue streams of high yield developers from the country are robust at the moment, and the chance of China’s housing bubble blowing up any time soon is slim. But the Chinese government has already come up with different measures to cool down the real estate market, mainly in first and second tier cities.
Most recently, local media reports said that commercial banks in Shanghai and Guangzhou, two of China’s biggest cities, are raising interest rates on housing loans while slowing down the approvals process for the loans. This goes to show that the uncertainty around the Chinese real estate market are real and things can go downhill very quickly.
There’s also no saying if the NDRC will put together fresh controls or ease up on the approval process going forward. On Monday, it named and shamed five firms — China Water Affairs Group, China South City Holdings, Mingfa Group (International) Company, PingAn Real Estate and China Mengniu Dairy Company — for failing to register themselves before going offshore.
The five are expected to now register with the regulator, which has warned that companies which skip the process in the future will be put on a negative list.
Over the years, one thing that the market has learnt is that that Chinese authorities are an unpredictable bunch. If China has its mind set on controlling corporates’ access to the international debt capital markets, there is no stopping it.
Undoubtedly, as Fantasia’s deal showed, a market for 364 days bonds exists and can grow given the buyside’s hunger for yield. But for borrowers, the drawbacks of these deals outweigh the benefits — and that is worth thinking about.