Something strange is happening in Chinese high-yield real estate debt.
It might all get paid back in three years and the market for it could simply disappear.
While it sounds like a risky investment, dollar-denominated bonds with high interest rates issued by Chinese real estate developers are being paid back at a quick rate.
And this is despite the volatility in the Chinese stock markets and yuan seen last year and the start of 2016.
Analysts from UBS led by Edwin Chan said companies are paying back about $10 billion (£7 billion) a year.
With no new debt coming on to the market, it won’t take long to exhaust the supply.
Here’s UBS (emphasis ours):
The sector has benefitted from positive technicals and exhibited resilience even in volatile markets.
Indeed, if we extrapolate from bond maturity and callable profiles, assuming no new issuance, the outstanding of Chinese HY universe could shrink by almost ¾ to USD10bn outstanding from USD35bn at present in two years’ time, and more or less disappear in three years’ time.
And here’s the chart:
As China’s currency depreciated against the dollar, and is expected to depreciate further, it makes issuing dollar-denominated bonds more expensive for Chinese companies. This explains the lack of supply of new bonds coming down the pipe.
At the same time, companies are rushing to pay back their existing dollar bonds before any more currency swings make it more expensive.
Fom this, it sounds like Chinese real estate debt is a sure thing, but UBS is cautious. Developers might take advantage of the conditions and take on more domestic debt, increasing their leverage and interfering with their ability to pay back the foreign debt a few years down the line.
Here’s UBS again:
While this technical may drive bond performances, the fundamental trend may not be all rosy for credits. Gearing risks my return as developers turn more active in landbanking to take advantage of rising prices and ample domestic liquidity.
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