Three Realty Firms Announce Bond Financing, With Highest Annual Rate Over 12%
Chen Shuzhen
/SOURCE : Yicai
Three Realty Firms Announce Bond Financing, With Highest Annual Rate Over 12%

(Yicai Global) Sept. 21 -- Three Chinese real estate firms issued bonds yesterday, raising their financing rate up to 12.5 percent per year in a tough financing environment.

The People's Bank of China has set the prevailing benchmark interest rate in commercial banks at 4.35 percent for one-year loans and 1.5 percent for one-year deposits.

Shanghai-based Zhenro Properties Group plans to issue notes which will expire in 2021 to raise USD280 million and  signed a sale agreement with Deutsche Bank, The Hong Kong and Shanghai Banking Corp. and CEB International Investment yesterday, Zhenro announced today.

It is issuing the notes to pay off its debts, but it may change its plans because of market changes and use the funds raised for other purposes, Zhenro said.

The annual rate of the notes the company is to issue is 12.5 percent and it estimates that these will receive a B- rating by Standard & Poor's Financial Services and B3 by Moody's, Yicai Global has learned.

Zhenro issued USD250 million in senior notes on June 28, which will expire in 2020, at an annual rate of 10.5 percent, which is of course lower. The funds raised by these two bond issues are in about the same amount, but those issued in June have a shorter term of two years.

Guangzhou R&F Properties is also floating senior bonds to raise USD200 million at an annual rate of 8.875 percent, it announced today. Its financing costs are thus clearly much lower than Zhenro's. R&F, which will use the funds for an offshore refinancing, projects obtaining a BB- from Fitch Ratings.

R&F had made three straight bond offerings before this one since early September, raising asset-backed special funds of CNY12.2 billion (USD1.8 billion). In the first half of this year, R&F issued USD1.25 billion in offshore dollar-denominated bonds and raised about CNY11 billion via super and short-term commercial paper, corporate bonds and other financing channels.

Frequent bond financing issues dramatically increased R&F's net debt ratio last year by 17.9 percent to 187.5 percent at the end of the reporting period, its interim statement for this year shows.

Guangdong province-based Country Garden Holdings was the third firm to announce new funding today. It will issue USD425 million in senior notes at an annual rate of 7.125 percent which will expire in 2020, and USD550 million senior bonds at an annual rate of 8 percent, which will expire in 2024.

Country Garden will use the income from the bonds -- about USD965 million -- for refinancing to repay foreign debts.

Country Garden issued a series of senior notes in January worth USD600 million and due in 2025 with an annual interest rate of only 5.125 percent.

Zhenro, F&R and Country Garden all issued new debt yesterday to repay existing debt.

"The three real estate companies issued bonds with a period of two years, three years and six years to replace short-term debt with long- and mid-term debt with the purpose of reducing short-term capital pressure," Zhang Hongwei, inspector general of Tospur Real Estate Consulting, told Yicai Global.

"Real estate companies prefer to lend to pay off previous debt in the latter half of the year when facing sector-wide financial strain. They mostly turn to foreign debt financing to reduce the financial pressure."

A comparison of the three companies' new and old debt shows their debt servicing costs have risen.

"The current yuan devaluation pressure has already affected domestic property companies. Yuan asset investment risks will accumulate as the US Federal Reserve continues to raise interest rates, and these companies are under the influence of regulatory policies, so the higher interest demand on the investors' side is normal." Huang Lichong, Synergy Solution Management Group's co-founder, told Yicai Global.

"Because the financing environment is tough, property companies will not consider cost as long as there are buyers. Once they fail to pay debt on time, a chain reaction will set in, including debt default," Huang said.

"Take Zhenro's US dollar bonds for example. Its financing costs may be as high as between 13 percent to 14 percent, plus access fees and others. Given that current non-bank financing channels also demand 15 percent, Zhenro's 12.5 percent is not that high. Financing costs are not very important compared with the urgent need for funding, as companies who fail the financing test will only come under more pressure," Zhang added.

Editor: Ben Armour

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Keywords: FINANCING , Rising Cost , Industry Analysis