A new report from Haitong Securities warns that an unprecedented volume of Chinese real estate sector debt is set to mature in 2018 and 2019 following a splurge on puttable bonds by developers during the 2015 – 2016 period.
Haitong’s “2018 Non-government Debt Maturation Volume Analysis” (到期压力不减，城投地产尤甚——2018年信用债到期量分析) indicates that the repayment volume for existing non-government debt including corporate bonds, commercial paper and private placement notes is approximately 4.08 trillion yuan for 2018 (USD$650 billion).
When the volume of short-term debt which is likely to be issued and mature within the year is added to this sum, Haitong analysts see the total volume of non-government debt scheduled to come due in 2018 rising to 5.26 trillion yuan in total, as compared to 5.3 trillion yuan non-government which matured in 2017.
Growth in the corporate bond repayment volume has accelerated, with 423.3 billion yuan in outstanding corporate bonds scheduled to mature this year.
When 988.6 billion yuan in puttable bonds is added to this amount, the total repayment volume could be as much as twice that for 2017.
Real estate sector debt repayments are on track to hit a peak of 161.3 billion yuan in 2018, or 2.3 times the amount for 2017.
The repayment volumes for 2019, 2020 and 2021 are 280.7 billion yuan, 399.8 billion yuan and 403.7 billion yuan respectively.
In addition to this over 380 billion yuan in outstanding real estate company bonds become puttable in 2018, as well as a further 370 billion yuan in 2019, taking sector repayment levels unprecedented highs.
According to Haitong analysts the reason for this is that Chinese real estate bonds often make use of a “3+2” or “2+1” year term structure, and following a huge “blow out” in real estate debt in 2015 – 2016, a large number bonds become puttable in 2018 – 2019.
Given that bond market yields are currently higher than during the 2015 – 2016 period, the opportunity cost for investors not putting is on the rise, heightening concerns over real estate sector risk.
“The putting percentage is likely to increase, and we should be alert to the liquidity risk created by puttable bonds,” said the report. “The pressure of maturing real estate bonds is immense, and if refinancing continues to be limited, this could also increase credit risk.”