Off-Balance-Sheet Bonds Add to Opaqueness of Co.’s Liabilities, But Impact on Repayment Risk Likely

Chinese real estate developers Yuzhou, Shimao and Logan have issued private bonds in recent months, and more companies have contemplated doing so. These off-balance-sheet borrowings were often raised through special purpose vehicles and not represented on the issuers’ consolidated financial statements. Some market observers view these bonds as the companies’ efforts to circumvent the government’s “three red lines” policy aimed at reining in developers’ leverage ratios.

While such borrowings add to the opaqueness of the companies’ liabilities, Fitch Ratings said it believes these bonds represent a relatively small portion of the debt structure and have a limited impact on the companies’ repayment risk. Nonetheless, regulators have required developers to report their off-balance-sheet items such as issuance by orphan SPVs, securitization of supply chain financing and equity that is debt-like in nature. Written by Shasha Dai, managing editor, Onshore China. Sign up for weekly updates here.