Rare Coupon Hikes Signal China Developers’ Need for Debt Relief

(Bloomberg) -- As many Chinese companies take advantage of declining interest rates to slash borrowing costs, some debt-laden developers are doing the opposite -- raising coupons to avoid having to buy back debt.

Developers make up almost a third of 16 bond issuers that substantially increased coupons this year when a put option allowing investors to sell their holdings back to the company came due, according to Bloomberg calculations based on public data. With a coupon hike of 100 basis points or more, the developers and other companies stand as outliers among almost 201 bond issuers, the majority of which maintained or lowered coupons.

The companies boosting coupons are looking to preserve capital by avoiding a forced repurchase, raising concerns about their finances, said Wang Chen, director of the credit division at private fund Genial Flow Asset Management Co.

“Any borrower able to lower a coupon would definitely do so,” said Yang Hao, a fixed-income analyst at Nanjing Securities, adding some are bound by terms to not reduce them. “A firm raising coupons is worth the attention on their potential refinancing risks.”

Developers attracting investors with higher coupons include Oceanwide Holdings Co., Yango Group Co. and Seazen Holdings Co. Yango, Seazen, Oceanwide and Chongqing Zhongke Holding Co. didn’t reply to calls seeking comment. Calls to Jinshiqi International Holding Co.’s Guiyang headquarters went unanswered.

China’s multi-year onshore bonds typically include a put option that allows bondholders to hold the notes to maturity or sell them back, making coupon adjustments a tug-of-war between borrowers and bondholders. In April, developer Gemdale Corp. reversed a plan to slash its coupon after it drew criticism from investors and a query from the Shanghai Stock Exchange.

Only 10% of bond issuers raised coupons on puttable bonds this year, the lowest level in four years, Bloomberg calculations show.

The coronavirus pandemic is accelerating a shakeout in China’s property sector, making cash flow tighter. Except for the country’s roughly 30 biggest developers, most builders now see cash reserves insufficient to cover short-term debt, S&P Global Ratings said in a June 1 report.

To be sure, the coupon spike doesn’t point to an upcoming default. In January, a coupon hike of 105 basis points failed to stop bondholders of mining company Chifeng Jilong Gold Mining Co. from exercising a put option, and the firm repaid the notes.

©2020 Bloomberg L.P.

With assistance from Bloomberg