* Analysts worry about currency mismatch of debt and revenues
* Sector sold record amount of foreign debt since 2012
* Depreciation could trigger bond covenants, result in losses
By Christopher Langner
SINGAPORE, March 6 (IFR) - The recent volatility in the Chinese currency has rekindled fears over the growing exposure of mainland property developers to overseas debt.
In the past two years alone, Chinese developers have issued US$40bn in foreign currency bonds, the result of a combination of onshore lending restrictions and low US dollar interest rates. The China property sector now accounts for some 40% of Asia's two biggest high-yield debt benchmarks, the Merrill Lynch and the JP Morgan Asian Credit indices.
Chinese borrowers have enjoyed an additional benefit of borrowing overseas, as exchange rates have moved in their favour. However, the recent reversal in the renminbi has raised concerns over the rapid growth of unhedged foreign exchange liabilities for companies that generate all their income in local currency.
Analysts are warning the overseas borrowing binge has become unsustainable. In a report published on Thursday, Standard & Poor's warned that sales revenues from the sector were no longer growing as fast as liabilities.
"Our ratings on these developers may face downward pressure as their debt increases may have outpaced property sales growth," said Standard & Poor's credit analyst Matthew Kong, referring to companies rated by the agency.
The renminbi has reversed course since touching a record high of 6.0395 against the US dollar on January 14, and slipped more than 1% in seven days to 6.1718 on February 28. It has since rebounded to 6.1105, but the spike in volatility poses challenges for Chinese companies with foreign exchange liabilities.
Between January 1 2012 and the same date this year, the renminbi appreciated 4.7%, effectively reducing the total liabilities of Chinese developers in their home currency and making it easier for them to meet interest payments.
As an example, in their mid-year reports last year, Agile Property Holdings reported a gain of Rmb348m (US$57m) from the effect of currency appreciation on its outstanding debt. China Overseas Land Investments recorded a HK$360.4m (US$46.8m) net foreign exchange gain.
It is no coincidence that these two companies are among the Chinese developers with the biggest exposure to foreign currency debt.
According to analysts at Credit Suisse, China Overseas Land Investments tops the list with 87.2% of its debt in foreign currencies, followed by China Resources Land, with 74.4%, and Soho China, with 67.2%. Kaisa Group and Agile Property are in the fifth and sixth position respectively, right after China Overseas Grand Oceans, with 60% and 56.6%, while Cogo has 63%.
Because of its high exposure to dollar-denominated debt, Credit Suisse calculated that a 5% depreciation in the renminbi could increase the net gearing of China Overseas Land Investments by 28%. The increase for Agile and Kaisa, two of the most frequent offshore bond issuers, is much worse: 104% and 76%, respectively.
Credit Suisse's piece also raised the alarm among investors and analysts over another issue: interest coverage.
Almost every single overseas bond from the Chinese property sector includes a limit on the fixed charge coverage ratio, which measures the number of times a company can meet its interest expenses through earnings and recurring income such as rental revenues. Such a clause is considered standard in the high-yield bond market.
"The depreciation of the currency could impact the fixed charge coverage ratio of these companies," said one high-yield analyst.
Recent bond issues have come with lower ratios, giving developers more flexibility but eroding investors' protection. Evergrande, for one, recently amended the terms on its outstanding debt to reduce the fixed charge coverage ratio to 2.75 times.
Others, however, may already be nearing their limits, suggesting that any further depreciation in the renminbi could have a big impact. A traditional approach to calculating fixed charge coverage yielded a ratio of 2.91x for Kaisa Group, based on the company's full-year earnings report, released last Tuesday.
Kaisa's outstanding 8.875% dollar bonds due on March 19 2018 require the company to maintain a minimum coverage ratio of 3x.
The covenants, however, require different calculations that usually yield higher ratios. Jim Cheung, Kaisa Group CFO, confirmed in an email that the company's fixed charge coverage ratio was above 3x as of 31 December 2013.
"It is very difficult to calculate the FCCR of a PRC property issuer based on only public information," he said. Cheung also stressed that falling below the threshold would not trigger an event of default.
"Even in case a company's FCCR is below 3x, it does not necessarily mean the company is in breach of covenants under most, if not all high-yield indentures in the PRC property sector. It's an incurrence test instead of a maintenance test concept," he said. "Kaisa has adequate headroom in terms of debt incurrence to support its business expansion."
While analysts and portfolio managers agree that a more volatile renminbi could impact the interest coverage of Chinese developers, they do not expect the effects of the most recent currency move to have a material impact on income statements.
One analyst noted that most of the companies in the sector are reporting earnings this month for the period ended December 31, at which point the renminbi was traded at 6.056 to the dollar, a record high.
"By the time they report mid-year earnings, the renminbi will have appreciated again," he said. (Reporting By Christopher Langner; editing by Steve Garton)