Offshore Bond Issuance by Real Estate Companies Restricted to Debt Repayments
Beijing has indicated that funds raised by Chinese real estate companies via offshore bond issuance should be used primarily for debt repayments, as part of broader efforts to reduce leverage and contain risk in relation to foreign debt.
The National Development and Reform Commission (NDRC) and the Ministry of Finance have jointly issued the “Notice Concerning Improvements to Market Restraint Mechanisms and Strict Prevention of Foreign Debt Risk and Local Government Debt Risk” (关于完善市场约束机制 严格防范外债风险和地方债务风险的通知).
At a press conference held by NDRC on 27 June, officials said that offshore bond issuance by Chinese enterprises currently suffers from three main problems:
i) The structure of the entities raising debt offshore requires further optimisation – for example the overall ratings of local municipal investment platforms is comparatively low, and there has been rapid growth in the scope of offshore bond issuance by real estate companies;
ii) Risk controls for offshore bond issuance by enterprises needs to be strengthened, with a focus on the repayment capabilities of enterprises.
iii) Further improvements are needed to co-ordination and cooperation mechanisms between government departments responsible for the regulation of offshore debt.
China has seen surging growth in offshore bond issuance by domestic enterprises in recent years.
Official figures indicates that in 2017 Chinese companies issued USD$235.8 billion in offshore bonds, while during the period from January to May offshore bond issuance reached $99.2 billion.
According to an NDRC official the past two years had seen especially strong growth in offshore bond issuance by real estate companies and local government financing platforms, whose credit ratings vary wildly and those operating revenues and profits are far from robust.
A research report from China Securities International points out that the low cost of overseas financing has driven rapid growth in offshore debt-raising by Chinese-invested enterprises, transforming it into a key channel for municipal financing platforms and real estate firms.
Since the start of 2018 offshore bond issuance by municipal investment platforms has reached approximately $4.5 billion, or around 4% of domestic bond issuance during the same period.
Since 2017 Chinese real estate enterprises have raised nearly $65.46 billion via offshore bonds, or approximately 78% of their domestic bond financing across the same period.
NDRC said that measures would be adopted in five areas in future in order to resolve problems in relation to foreign debt including:
i) Vigorous efforts to optimize the foreign debt structure.
Beijing will provide greater support to offshore debt issuance by large-scale enterprises and financial institutions, as long as their “comprehensive economic capabilities are strong, their level of internationalised operation is high, and their risk control mechanisms are sound.”
Beijing will also place emphasis upon the use of funds for “innovative development, ecological development, emerging sectors and high-end manufacturing.”
ii) The drafting of “Enterprise Foreign Bond Registration Administrative Measures” (企业发行外债登记管理办法) as soon as possible.
Clarification of the qualifications and conditions for the issuance of corporate bonds, improvements to filing and registration methods and handling procedures, and an increase in the convenience of cross-border financing.
Beijing also plans to strengthen the collation of information on foreign debt, and outline mechanisms for the prevention of regulatory breaches.
iii) Standardise the relevant qualifications and fund usages of foreign debt raised by enterprises.
Financial regulators will require that real estate enterprises primarily use funds raised via offshore debt issuance for the repayment of maturing debt, while restrict their usage for investment in domestic or overseas real estate projects.
They will also require that enterprises provide fund usage commitments, strengthen foreign debt risk warnings, and unveil new punitive measures for regulatory breaches.
iv) Expedite and guide market entities and intermediation bodies in actively strengthening their analysis and assessment of international capital markets.
This will involve “rational allocation of assets and liabilities, and optimised matching of currencies and maturities.”
Financial regulators will encourage Chinese enterprises to make use of derivatives such as currency swaps, currency forwards and options to “prevent exchange risk, reduce debt costs, and strengthen repayment capabilities.”
iv) Improve the co-ordination of regulatory mechanisms between departments.
Beijing will actively strengthen communication, coordination and information sharing between the State Administration of Foreign Exchange and other financial regulators.