Aoyuan Denies Off-Balance-Sheet Bond Issuance Rumor; Bonds Slide on Concerns About Hidden Debt, Reliance on Joint Venture Projects

Property developer China Aoyuan Group has denied a market rumor originated from an article on WeChat yesterday, April 8, that it recently issued an off-balance-sheet dollar bond, said two buysiders briefed by the company.

The alleged off-balance-sheet bond issuance, a $150 million 7.2% unlisted note due Sept. 27, 2022, borrowed by a company called Rainmaker Solutions through sole bookrunner Orient Securities International on March 17, caused Aoyuan’s offshore notes to drop about four points on the long-end yesterday, buysiders said.

While the practice is not uncommon among Chinese property developers, the rumor added to existing market concerns about Aoyuan’s significant exposure to non-controlling interests and guarantees to joint venture projects, the buysiders added.

Prices of Aoyuan’s offshore notes have already been under pressure since late last month when industry peer Yuzhou Group issued a profit warning and later reported a 94% plunge in profit due to deconsolidation of certain joint venture projects. Aoyuan’s longest-dated $350 million 5.88% senior notes due March 1, 2027, dropped about 10 points from 99.5 in the past two weeks, and its $350 million 6.2% due March 24, 2026, notes fell to the low 90s today from 102 in late March.

Denying the rumored off-balance-sheet issuance, an investor relation representative of Aoyuan said the company’s operations are normal, and that she is not aware of any reason that might have caused the drop in bond prices.

Off-balance-sheet bonds are normally issued by third-party special purpose vehicles with guarantee provided by the ultimate borrower that expires on June 30 and Dec. 31 each year when a company is required to report its balance sheet positions, according to buysiders familiar with these bonds.

They have become especially popular among Chinese property developers to move debt off the books under the regulators’ “three red lines” test, they said.

As reported, Aoyuan said on a non-deal roadshow last week that it had prepared sufficient funds to redeem its upcoming $425 million 7.5% notes due May 10. It also had just raised $230 million from the first tranche of a three-year offshore syndicated loan facility from Bank of China (HK), Bank of East Asia, Barclays Bank, Chong Hing Bank, CMB Wing Lung Bank, Deutsche Bank, Hang Seng Bank, Nanyang Commercial Bank and Tai Fung Bank.

Aoyuan’s capital structure is as follows: