According to CreditSights, a bond research firm, the total amount of offshore debt to be repaid by mainland real estate companies soared to US$53.5 billion (HK$417.3 billion) in the year, an increase of more than 1.1 times compared to US$25.4 billion in 2020, plus the mainland government has set a new rule to tighten financing for mainland real estate companies. The “three red lines” of the new rules, so that the lending environment is more tense, the market worries about the property market bubble has a hidden surge, and intensify the risk of debt default.
Due to the mainland’s “three red lines” for mortgage loans, the support from large domestic banks for domestic real estate companies is weakening. Owen Gallimore, head of credit strategy at Australia and New Zealand Bank (ANZ), pointed out that as of last Thursday, there were about $34 billion (about HK$265.2 billion) of Chinese corporate bonds with interest rates over 15%, of which $25.5 billion (about HK$198.9 billion) was real estate debt, and it was difficult for the companies concerned to obtain bank financing.
Although mainland bond defaults are not new, but the end of last year and Brilliance Automotive Group, Tsinghua Ziguang Group, Yongcheng Coal Power and many other state-owned enterprises, damaging the confidence of investors in the debt market, and the real estate companies have become a high amount of yuan debt industry to worry about the market. Rating agency Moody’s said outright that it would not be surprised by the emergence of debt defaults by weak issuers in the market. Even though the credit rating company believes that the outlook for the domestic housing sector remains stable, it still needs to pay attention to the banks’ lending caps.
It is worth noting that China Evergrande (0333), a pilot real estate company that was included in the “three red lines” in August last year, has a total debt due this year of nearly $3 billion, with interest rates ranging from 13 to 17% on its outstanding U.S. dollar bonds. In addition, the domestic real estate company Jiayuan International (02768) announced the issuance of $300 million of senior notes with an annual interest rate of 12.5%, due in 2023. According to our statistics, counting the past two weeks announced the issuance of notes of as many as 23 domestic real estate companies, all denominated in U.S. dollars, involving a total of about $ 8.687 billion, with annual interest rates ranging from 2.7 to 14.25%, including Cinnamon Park (02007), Shimao Group (00813) and other companies.
Although the “three red lines” has not yet been officially promulgated policy details, but earlier has been rumored that the provisions of the real estate enterprises excluding pre-receipts after the gearing ratio shall not be higher than 70%, net debt ratio can not exceed 100%, and cash to short term debt ratio can not be less than double, as a warning line indicators, and according to the specific indicators of real estate enterprises in the “red, orange, yellow and green” four levels of management.
If they meet all the indicators, they will be classified as green level, and the annual growth rate of interest-bearing liabilities can be relaxed to 15%; if they violate only one warning line, they will be classified as yellow level, and the annual growth rate of interest-bearing liabilities can be relaxed to 10%; if they violate two warning lines, they will be classified as orange level, and the annual growth rate of interest-bearing liabilities cannot exceed 5%; if they violate all three warning lines, they cannot increase interest-bearing liabilities.
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