Moody’s Investors Service says that the depreciation in the renminbi that has followed the shift in the mechanism for determining the daily fixing rate of the Chinese currency against the dollar is credit negative for Chinese property developers, given their significant exposure to foreign-currency debt, the majority of which is denominated in USD.
“Nevertheless, all else being equal, we believe that the majority of our rated developers could withstand up to a 10% depreciation of the RMB relative to foreign currencies without it impacting their credit ratings,” says Simon Wong, a Moody’s Associate Managing Director.
Wong was speaking on the release of a new Moody’s report on China’s property sector, entitled, Rated Developers Have Headroom to Withstand Modest RMB Depreciation. The report follows the People’s Bank of China announcement on 11 August that it would start basing the fixing rate of the renminbi against the dollar on the previous day’s market prices.
“Furthermore, it is possible that other factors could counterbalance the impact of an RMB 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,” says Wong.
At end-2014, an average 35.5% of the debt structures of the 43 rated developers analysed in the new Moody’s report comprised foreign currency-denominated debt — including offshore bonds and bank loans — and this foreign-currency risk is largely unhedged.
“Because of the mismatch between their foreign-currency debt obligations and RMB-denominated revenue and operating cash flow, their interest expenses and the principal amounts of foreign-currency debt will increase in tandem with a depreciating renminbi,” adds Wong.
Moreover, the 14 rated developers with the largest percentages of foreign-currency debt relative to total reported debt would see their leverage, as measured by revenue-to-debt or debt-to-capitalization, weaken under a 10% depreciation scenario against the US dollar.
This 10% depreciation sensitivity analysis is for testing the rated developers’ resilience to a higher-than-expected renminbi depreciation, which is not our core scenario or expectation.
Moody’s believes that high investment grade developers — such as China Overseas Land & Investment Limited (COLI, Baa1 stable) and China Resources Land Limited (CR land, Baa1 stable), despite being amongst those with the highest exposure to foreign-currency debt — are less impacted due to their strong financial buffers and state-owned enterprise status or affiliation.
In addition, Moody’s notes that the foreign-currency bonds of property developers coming due through 2016 are relatively small in amount, thereby limiting the near-term impact on liquidity due to currency depreciation.
But, with the bonds maturing in the next 12 months, refinancing risk remains very high for Glorious Property Holdings Limited (Caa3 negative) and Renhe Commercial Holdings Company Limited (Caa1 negative). At the same time, such risk has already been factored into their low ratings.
Furthermore, in Moody’s view, the foreign-currency exposures of rated Chinese developer have likely peaked and will decline over the next one to two years as developers increase usage of the onshore bond market.
In this context, Moody’s notes that the opening up of the domestic bond market to property developers provides rated companies with an alternative source of long-term funding that is not exposed to foreign-exchange risk. Some RMB78.9 billion (US$12.3 billion) of domestic bonds have been issued so far in 2015. In contrast, offshore bond issuance over the same period declined by 54% to US$8.4 billion.