Comments on Xinyuan Real Estate’s Approval to Issue Domestic Corporate Bonds

Xinyuan announced today that it has received approval to issue up to RMB2.2Bn of domestic corporate bonds.

The indicated rate of 5.5 to 7.5% falls within the range of other offshore listed B-rated Chinese property developers.  My guess is that XIN will pay about 7% due to its higher than average debt level:

Chinese Bond Issues

Bond proceeds will replace part of XIN’s $676mm balance of trust loans (as of 6/30/15) at rates of 11-12% generating annual pretax savings of about $17mm/year (2.2Bn RMB bonds * 5% savings / 6.47 RMB)

XIN High Interest Debt 063015

The combination of new domestic borrowing and high cash inflow from delivery of the Oosten project in Williamsburg should facilitate refinancing of Xinyuan’s 2018 and 2019 USD bond issues.  If the current $400mm of bonds yielding 13% and 13.25% can be replaced with $300mm f debt yielding 9% then pretax savings will be $26mm (current annual interest of $53mm on $400 debt replaced by $27mm of interest on $300mm debt).  Due to prepayment penalties refinancing at rates above 10% would not be attractive.

Extension of average debt maturities and lower interest burden will leave more cash flow available for share repurchases.  In 2012 Xinyuan authorized repurchase of up to $60mm of its stock, but with $979mm of debt currently due within one year it would have been reckless to apply a significant amount of cash towards buying stock and thereby increasing the company’s leverage ratio.  Xinyuan’s rising asset turnover should now be deleveraging the balance sheet and longer-debt maturities will improve corporate liquidity enabling a more aggressive buy back in 2016.

Listing of Xinyuan (China) bonds on the Shanghai Stock Exchange opens the long-term possibility for domestic issuance of XInyuan (China) stock.  Shanghai listed property developers currently trade in a range of 1.5-2.5 times book value.  Issuance of Xinyuan (China) shares at such a level would provide capital for long-term growth, increase visibility into the value of Xinyuan’s business, and be highly accretive to the parent company NAV per share.

 

 

 

 

 

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2 thoughts on “Comments on Xinyuan Real Estate’s Approval to Issue Domestic Corporate Bonds

  1. Listing of XIN in Shanghai stock exchange requires a triple of the current price to be NAV per share accretive. I don’t think it is foreseeable…

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    1. Hi Herman, I don’t believe that XIN (the Cayman Islands parent company) would be eligible to list in China. Instead I see a possible long-term potential to have XIN as a holding company with several listed subsidiaries:

      Xinyuan International Property Investment (development outside China)
      Xinyuan (China) Real Estate (development inside China)
      Xinyuan Property Services
      Xinyuan Investment Management (advising third party funds )

      Each of these units could be listed when market conditions are favorable. Xinyuan (China) would be valued in the domestic market based on its stand alone financial statements (not the same as the parent company).

      Several other companies are moving in a similar direction. Fantasia listed its Property Services unit (Colour Life) and Future Land has an offshore/onshore listing structure (HK:1030 and SS: 601155).

      It’s possible that the US market would never be able to fairly value Xinyuan’s Chinese property business. The holding company structure I suggested would enable the operating businesses to raise equity at a lower cost of capital when appropriate while also providing greater transparency into the value of the consolidated enterprise and lead to a higher XIN share price. – John

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