MARKETS_ China’s Big Dollar Borrowers Hold Off on Hedging Foreign-Currency Debt

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China’s Big Dollar Borrowers Hold Off on Hedging Foreign-Currency Debt

Even as falling yuan adds to their liabilities, many say cost of hedging isn’t worth it

By Fiona Law And Esther Fung
Aug. 28, 2015 9:58 a.m. ET

Chinese real-estate firms, among the country’s heaviest dollar borrowers, aren’t rushing to hedge their foreign-currency liabilities even as the surprise devaluation of the yuan last month adds to their debt load, according to interviews with property developers, bankers and analysts.

The Hong Kong-listed shares of Chinese real-estate developers are trading at their lowest in months, reflecting worries about their exposure to dollar debt. But these firms, massive issuers of U.S. and Hong Kong dollar debt in recent years as the yuan rose, say the costs of hedging their exposure to overseas currencies isn’t worth it. The yuan is down 2.9% since Beijing’s move to devalue it in early August, having retraced some of its losses after China injected liquidity into the system. In contrast, hedging, based on the interest charged on cross-currency swaps, could cost as much as 3.7% of the U.S. dollar debt that is being hedged.

“FX hedging can’t completely solve our problems,” said Junming Ou, chief financial officer of Yuexiu Property Co., a property developer based in the southern Chinese province of Guangdong.

Out of Yuexiu’s 32 billion yuan ($5 billion) in bonds and loans, 59% of the debt was raised offshore in U.S. and Hong Kong dollars, the company said. A 1% drop in the yuan could lead to an 8 million yuan ($1.2 million) currency-exchange loss, according to Citigroup.

“We have no idea how much the yuan will depreciate. If its fall turns out to be small, it’s not worth paying for the hedges,” Mr. Ou added. Mr. Ou didn’t comment on the Citi report.

Starved of cash in recent years for land purchases at home while Beijing tightened credit, Chinese real-estate firms have been big issuers of U.S. dollar debt, with total debt currently at $63 billion, according to Dealogic. A broadly appreciating yuan made it easier to pay down foreign-currency borrowings, but with the yuan now falling, home builders from state-owned giants such as China Overseas Land & Investment Ltd. to riskier lower-rated firms such as Fantasia Holdings Group Co. will be exposed to currency-exchange losses as well as higher debt payment burdens.

For now, that call to hold off foreign-exchange hedging—typically through cross-currency swaps—makes sense. With the yuan falling, any company seeking to hedge its exposure in the currency into U.S. dollars would have to pay a higher interest rate than before: At the moment, swapping dollars to yuan would lead to a 3.7% interest charge—so a company that wanted to hedge a billion dollars in debt would need to set aside $37 million to pay for that hedge.

“I believe the renminbi will rise again in the next few years as China’s economy remains relatively strong. We won’t really suffer from losses,” said Evergrande Real Estate Group Chief Financial Officer Parry Tse said, referring to another name for Chinese currency. Guangzhou-based Evergrande, which is also known for backing the country’s most successful soccer team, is holding off on hedging, too.

In cross-currency swap contracts, a company swaps the principal and a series of interest payments of a yuan loan into U.S. dollars for a certain period.

China Vanke Co., the country’s biggest developer by sales, is one of the few firms that has hedged its foreign debt exposure, bankers said. Its hedge has caused some losses but also mitigated the company’s foreign-exchange risks, a Vanke spokesperson said in an emailed statement. Shanghai-based developer Shui On Land also adopted a cross currency swap amounting to 2.5 billion yuan to hedge the yuan against the dollar.

“If you don’t hedge, it’s hard to answer investors’ questions about your FX exposure,” said Eric Sim, a banker at UBS AG who advises Asian companies.

Many that don’t hedge are seeking to raise more debt at home, where the central bank’s rate cuts have been bringing down borrowing costs.

“We understand that many Chinese developers are still reviewing their hedging options,” said Franco Leung, a senior analyst at Moody’s Investors Service. The firms are mainly concerned about the hedging costs, and are still forming their views on how much further the yuan will weaken. “Some developers may prefer to raise more onshore debt to reduce foreign currency risk down the road,” said Mr. Leung, who speaks with rated property developers regularly.

Country Garden Holdings Co., also based in China’s Guangdong province, is a case in point: It sold 6 billion yuan ($938 million) in domestic bonds this month, and used the funds to buy back a $900 million offshore bond issued in February. The real-estate firm has managed to cut down its dollar liability to less than 50% of its total debt, Chief Financial Officer Wu Jianbin said in a recent news conference. The company plans to raise 8 billion yuan more in domestic debt this year.

Write to Fiona Law at fiona.law@wsj.com and Esther Fung at esther.fung@wsj.com

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