China Tightens Bond Sale Rules for Developers to Curb Debt

(Bloomberg) -- China has taken a fresh step to rein in debt growth among the nation’s property developers, amid signs that a strong housing market recovery has prompted policy makers to refocus on risk prevention.

The National Association of Financial Market Institutional Investors, an influential body in the nation’s vast interbank market, has issued new guidelines that allow residential property developers to apply for new bonds that can only be used for debt refinancing, according to people familiar with the matter, citing guidelines from NAFMII.

In addition, the proposed size of any new bond mustn’t exceed 85% of the total outstanding debt that the issuer needs to repay, said the people who are not authorized to speak publicly and asked not to be identified. Developers had previously been able to use proceeds from bond sales to repay all due debts or for other purposes.

“The latest move is intended to reduce property developers’ outstanding debt size and cut their leverage,” said Li Yuze, credit analyst from China Merchants Securities Co. “In addition, it also aims to prevent builders from rolling over old debt too frequently.”

The rules apply only to bonds sold in the interbank market, which is the main bond trading venue. The new rules took effect after Aug. 10., said the people.

Chinese property developers have 1.56 trillion yuan ($230 billion) worth of bonds outstanding in the interbank market, while the value of their offshore dollar-denominated notes stands at $219.5 billion, according to data compiled by Bloomberg.

The real estate subindex on the Shanghai Stock Exchange finished Thursday down 0.5%, the worst performer among its peers, while the benchmark Shanghai Composite Index ended virtually flat, according to data compiled by Bloomberg.

Some of China’s offshore property bonds fell as much as 0.5 cent on the dollar Thursday over concerns about potential liquidity tightening in the domestic market, according to credit traders in Hong Kong. China Evergrande Group’s dollar bond due 2025 fell 0.6 cent on the dollar to 84.2 cents as of 5:40 p.m. in Hong Kong, while China Fortune Land Development Co.’s note due 2025 dropped 0.4 cent on the dollar to 97.2 cents, the biggest drop for both notes in nearly three weeks, Bloomberg-compiled pricing showed.

The latest curb on debt refinancing came after China’s housing market staged a remarkable comeback from a dearth of activity during the virtual economic shutdown in the immediate aftermath of the virus outbreak. Home prices in the country rose at the fastest pace in 10 months in June, prompting some local authorities to roll out fresh housing curbs.

Top policy makers also have reiterated in recent weeks that the property sector won’t be used as short-term stimulus to shore up the economy.

NAFMII officials have yet to respond to an emailed request for comment.

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With assistance from Bloomberg