Chinese property developers with foreign currency financing face both diminished revenue and higher debt service costs following the recent devaluation of the yuan. However, Moody’s Investors Service analysts maintain there is some room to manoeuvre before credit ratings are negatively affected.
A new report looks at 43 Moody’s rated investors carrying, on average, 35.5 per cent of their debt structure in offshore bonds and loans, and concludes the majority could withstand a depreciation of up to 10 per cent in the yuan’s value relative to the U.S. dollar. In such a scenario, the report projects that 14 developers with foreign currency debt exceeding 40 per cent of their total debt load could experience a four to five per cent drop in their revenue-to-debt ratios and a one to two per cent increase in their debt-to-capitalization ratios.
“The 10 per cent depreciation sensitivity analysis is for testing the rated developers’ resilience to a higher-than-expected depreciation, which is not our core scenario or expectation,” the report states.
Two companies with the highest exposure to debt in foreign currency — China Overseas Land & Investment Limited and China Resources Land Limited — continue to hold Baa1 stable investment ratings due their strong financial standing and status as, or affiliation with, state-owned enterprises.
Only a small number of the surveyed property developers have foreign currency bonds coming due over the next 12 months. Of these, Glorious Properties Holdings Limited, is considered most vulnerable — with US $300 million due in October 2015 — and its rating has now been downgraded to Caa3 negative.
“It is possible that other factors could counterbalance the impact of (the yuan) depreciation, including the potential for further declines in domestic interest rates and the ongoing opening up of the domestic bond market as a funding avenue,” adds Simon Wong, an associate managing director with Moody’s.
Thus far in 2015 Chinese property developers have secured $78.9 billion yuan (U.S. $12.3 billion) on the domestic bond market versus U.S. $8.4 billion in offshore bonds.
