Global bond market conditions tighten

Chinese companies will find it harder to repay their existing foreign debt due to the tight conditions in the overseas bond markets and a strengthening of the US dollar, experts said on Thursday.

The average price for Chinese non-investment bonds in the US market has dropped 0.37 cents since Monday to a one-month low of 98.26 cents, the Bank of America Merrill Lynch index showed on Wednesday. The onshore yuan value weakened 0.2 percent on Thursday, after a two-day loss of 2.8 percent following the surprise yuan devaluation on Tuesday.

Chinese homebuilders, who are the largest issuers of US dollar-denominated bonds, were hit hard by the yuan depreciation.

Agile Property Holding Ltd's 8.875 percent notes due in 2017 dropped to 100.93 cents on Wednesday, the lowest in almost two weeks. Country Garden Holdings Co's 7.5 percent debentures due in 2020 slipped 0.94 cents to 103.58 cents.

Barred from access to the domestic bond market due to the central government's restrictions, China's homebuilders started raising funds in overseas bonds market in 2010.

This year (as of early June) they have issued $5.82 billion dollar-denominated bonds, according to Bloomberg's data. So far China's builders with non-investment grade ratings have $28.6 billion of outstanding dollar-denominated bonds.

That means the combined 3 percent devaluation in the yuan as of Thursday threatens to add $858 million to their debt servicing costs.

For all the China-based companies, their total outstanding dollar-denominated and euro-denominated debts (including bonds and loans) of $529 billion mean they will have to pay an additional $15.9 billion more to repay their debt, Bloomberg data showed. Adding to the woes, most of the Chinese issuers did not hedge their foreign-currency debt due to high cost concerns.

Christopher Lee, a Standard & Poor's credit analyst, estimated that offshore bonds usually account for about 20 percent of Chinese developers' total debt portfolio. A large portion of the debt is highly leveraged and backed by unstable cash flows.

Builders with non-investment grade ratings have about 30 percent of their total debt in foreign-currency borrowing on average, according to global credit ratings agency Moody's Investors Service.

However, the amount of the developers' overseas debt coming due through 2016 is relatively small, limiting the near-term impact, according to Franco Leung, a property analyst at Moody's.

The negative impact might also be mitigated by this year's stronger housing sales after the property market recovery. In addition, the regulator's decision to allow access to the onshore bond market will also bolster sentiment.

Property firms have sold $16 billion onshore bonds this year as of early June, the highest to date and even more than the overseas bond issues.