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Category Archives: Debt

Charts: Foreign Holding of USD Down in 2022

Source : Goldmoney

Chart: American Household Debt Hits a New High in Q3 2022

Rising $351bn in the quarter, taking the total owed by households to more than $16.5 trillion.

Source : Chartr

China’s Central Bank Urges Banks to Maintain Stable Property Financing

China’s financial regulators have asked banks to stabilize lending to property developers and construction firms, the latest effort by policymakers to turn around the real-estate crisis and bolster economic growth.

Authorities support the “reasonable” extension of existing real estate development loans and trust loans, according to a statement posted on the People’s Bank of China’s website after a Monday meeting with commercial banks. The gathering was jointly organized by the central bank and the banking regulator.

The regulators reiterated that the “reasonable” demand of home buyers for mortgages will be met. A key financing support program must be “used well” to help private property developers sell bonds, while legal protection and regulatory policy support for special loans aimed at ensuring housing-project delivery will be improved to promote the stable and healthy development of the market, the statement said.

The call is the latest in a slew of actions taken by the government to try to stop the more-than-yearlong slump in the real estate market that’s dragging down China’s economic growth and undermining local-government income. Bond defaults by cash-strapped developers have sent shockwaves across the financial markets, while delays in property-project delivery have driven homebuyers to stop mortgage payments in protest.

In a possible sign of willingness to shift away from the previous tightening stance on the real estate sector, PBOC Governor Yi Gang emphasized Monday that the industry is critical for the economy. “The property sector is linked to many upstream and downstream industries, and its healthy operating cycle is significant for the economy,” Yi said at a financial forum in Beijing.

Meanwhile, the PBOC is planning to provide 200 billion yuan ($28 billion) in interest-free relending loans to commercial banks through the end of March, 2023, in a move to support them to provide matching funds for stalled property projects, China Business News reported, citing the central bank’s meeting with commercial banks on Monday.

Adding to the positive messages sent by the authorities, Yi Huiman, chairman of the China Securities Regulatory Commission, said at the same event that his agency will support property developers’ reasonable bond financing needs and support mergers and acquisitions in the sector.

Support Package

The main points from Monday’s meeting are similar to a 16-point package authorities rolled out earlier this month to help embattled developers, who have at least $292 billion of onshore and offshore borrowing maturing through the end of next year. The push followed regulators’ orders for banks to dole out hundreds of billions of yuan in financing for developers in the remainder of this year.

The remarks by Yi Gang are “a rare recognition of the property sector’s irreplaceable significance” by a top financial official, according to Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong. The government’s recent supportive policies “demonstrate that Beijing is willing to reverse most of its financial-tightening measures,” he added.

At the meeting on Monday, the PBOC and the China Banking and Insurance Regulatory Commission also urged banks to expand medium- and long-term lending to help policy bank financing drive effective investment. Credit demand from manufacturers and service providers should be supported via the special relending loan program for equipment upgrading, the regulators added.

Yi said at the forum that the outstanding size of the relending programs targeting sectors such as technology innovation, transport and logistics and equipment upgrading is about 3 trillion yuan ($419 billion), adding they will be ended after policy goals are reached.

Stocks Down

A Bloomberg gauge of Chinese developers’ stocks ended the day 2% lower, after sinking as much as 4% in the morning. The Shanghai Stock Exchange Property Index closed 0.5% lower after earlier being down 2.7%.

PBOC Deputy Governor Pan Gongsheng and CBIRC Vice Chairman Xiao Yuanqi made comments at the Monday meeting, which was attended by heads of institutions including the major state-owned banks, joint stock lenders, and the branches of the central bank and the banking regulator, according to the statement.

Source : BNN Bloomberg

Chart: American Soaring Debt Payment Wiped Out Savings

Source : Bloomberg

Charts: US Household Debt Jumps Most Since 2008

Source : Bloomberg and Wolfstreet

Chart: Debt Service Costs in G-7 Countries

Source : Bloomberg

Global Rate Hikes Strike the Wall of Debt Maturity

Daniel Lacalle wrote . . . . . . . . .

More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.

Raising interest rates is a necessary but insufficient measure to combat inflation. To reduce inflation to 2%, central banks must significantly reduce their balance sheets, which has not yet occurred in local currency, and governments must reduce spending, which is highly unlikely.

The most challenging obstacle is also the accumulation of debt.

The so-called “expansionary policies” have not been an instrument for reducing debt, but rather for increasing it. In the second quarter of 2022, according to the Institute of International Finance (IIF), the global debt-to-GDP ratio will approach 350% of GDP. IIF anticipates that the global debt-to-GDP ratio will reach 352% by the end of 2022.

Global issuances of high-yield debt have slowed but remain elevated. According to the IMF, the total issuance of European and American high-yield bonds reached a record high of $1,6 trillion in 2021, as businesses and investors capitalized on still-low interest rates and high liquidity. According to the IMF, high-yield bond issuances in the United States and Europe will reach $700 billion in 2022, similar to 2008 levels. All of the risky debt accumulated over the past few years will need to be refinanced between 2023 and 2025, requiring the refinancing of over $10 trillion of the riskiest debt at much higher interest rates and with less liquidity.

Moody’s estimates that United States corporate debt maturities will total $785 billion in 2023 and $800 billion in 2024. This increases the maturities of the Federal government. The United States has $31 trillion in outstanding debt with a five-year average maturity, resulting in $5 trillion in refinancing needs during fiscal 2023 and a $2 trillion budget deficit. Knowing that the federal debt of the United States will be refinanced increases the risk of crowding out and liquidity stress on the debt market.

According to The Economist, the cumulative interest bill for the United States between 2023 and 2027 should be less than 3% of GDP, which appears manageable. However, as a result of the current path of rate hikes, this number has increased, which exacerbates an already unsustainable fiscal problem.

If you think the problem in the United States is significant, the situation in the eurozone is even worse. Governments in the euro area are accustomed to negative nominal and real interest rates. The majority of the major European economies have issued negative-yielding debt over the past three years and must now refinance at significantly higher rates. France and Italy have longer average debt maturities than the United States, but their debt and growing structural deficits are also greater. Morgan Stanley estimates that, over the next two years, the major economies of the eurozone will require a total of $3 trillion in refinancing.

Although at higher rates, governments will refinance their debt. What will become of businesses and families? If quantitative tightening is added to the liquidity gap, a credit crunch is likely to ensue. However, the issue is not rate hikes but excessive debt accumulation complacency.

Explaining to citizens that negative real interest rates are an anomaly that should never have been implemented is challenging. Families may be concerned about the possibility of a higher mortgage payment, but they are oblivious to the fact that house prices have skyrocketed due to risk accumulation caused by excessively low interest rates.

The magnitude of the monetary insanity since 2008 is enormous, but the glut of 2020 was unprecedented. Between 2009 and 2018, we were repeatedly informed that there was no inflation, despite the massive asset inflation and the unjustified rise in financial sector valuations. This is inflation, massive inflation. It was not only an overvaluation of financial assets, but also a price increase for irreplaceable goods and services. The FAO food index reached record highs in 2018, as did the housing, health, education, and insurance indices. Those who argued that printing money without control did not cause inflation, however, continued to believe that nothing was wrong until 2020, when they broke every rule.

In 2020-21, the annual increase in the US money supply (M2) was 27%, more than 2.5 times higher than the quantitative easing peak of 2009 and the highest level since 1960. Negative yielding bonds, an economic anomaly that should have set off alarm bells as an example of a bubble worse than the “subprime” bubble, amounted to over $12 trillion. But statism was pleased because government bonds experienced a bubble. Statism always warns of bubbles in everything except that which causes the government’s size to expand.

In the eurozone, the increase in the money supply was the greatest in its history, nearly three times the Draghi-era peak. Today, the annualized rate is greater than 6%, remaining above Draghi’s “bazooka.” All of this unprecedented monetary excess during an economic shutdown was used to stimulate public spending, which continued after the economy reopened… And inflation skyrocketed. However, according to Lagarde, inflation appeared “out of nowhere.”

No, inflation is not caused by commodities, war, or “disruptions in the supply chain.” Wars are deflationary if the money supply remains constant. Several times between 2008 and 2018, the value of commodities rose sharply, but they do not cause all prices to rise simultaneously. If the amount of currency issued remains unchanged, supply chain issues do not affect all prices. If the money supply remains the same, core inflation does not rise to levels not seen in thirty years.

All of the excess of unproductive debt issued during a period of complacency will exacerbate the problem in 2023 and 2024. Even if refinancing occurs smoothly but at higher costs, the impact on new credit and innovation will be enormous, and the crowding out effect of government debt absorbing the majority of liquidity and the zombification of the already indebted will result in weaker growth and decreased productivity in the future.

Source : Daniel Lacalle

Charts: Interest Rate Increase Posed Risk to High Japan Housing Loan

Source : Nikkei

Hong Kong’s Property Developers Will Struggle to Service Their Debts as Interest Rates Soar

From SCMP . . . . . . . . .

Raymond Cheng, managing director of CGS-CIMB Securities, has a sense of deja vu.

With Hong Kong’s housing market struggling, interest rates soaring and buying power faltering amid a slowing economy, the worrisome debt levels of property developers are in the spotlight.

The same was true in the years just before Cheng became an analyst in 2003.

“At that time, they could not make profits from home sales. Certain developers had tight financials, and most made little profit,” he said. “Generally, the whole cycle from 1997 to 2003 was a very difficult phase for Hong Kong developers.”

Home builders’ gearing ratios – a measure of how much of their operations are funded by debt – at that time were particularly high, at 60 to 70 per cent, Cheng said. Many of them had been aggressive in their land acquisitions, their appetite for risk fuelled by the many opportunities in the market in the 1990s.

During the deep correction between 1997 and 2003, when home prices nosedived some 60 per cent, they suddenly found themselves losing money on property sales.

The painful experience of those troubled times was enough to make many of them more financially prudent. Over the next few years, gearing levels fell to about 10 to 20 per cent as the developers reined in their expansion and allocated more of their money to investment properties.

But the low interest rate environment that’s dominated economics since the financial crash of 2008 has fuelled a resurgence of debt.

“It might have made developers feel the cost [of borrowing] was low,” said Cheng. Certain developers seized the opportunity to expand in mainland China, pushing up their gearing ratios once more.

Now, with borrowing costs at a 14-year high and certain to rise further, this could be problematic.

Developers are likely to have a hard time turning a profit as the interest payments on their debt mountains get bigger, say analysts. They are likely to be less aggressive bidding for land, and may even come under pressure to offload assets at lower prices.

“The US interest rate hikes caught developers whose gearing had rapidly increased off-guard,” said Cheng. “It suddenly increased the pressure on their cash flow.”

Home prices declined by 8.1 per cent in the first nine months of the year, reflecting the impact of higher interest rates and the lingering effects of coronavirus restrictions.

Hong Kong property companies have taken on an additional HK$109 billion (US$13.89 billion) of debt in the past three years as they took advantage of low interest rates that lasted until as late as the first half of 2022, when the one-month Hibor (Hong Kong interbank offered rate) – the rate banks charge each other for borrowing money – averaged just 0.2 per cent, according to Morgan Stanley.

The average net gearing, or net debt to equity ratio, of developers and landlords has risen from about 15 per cent five to 10 years ago to 22 per cent now, said Cheng.

New World Development is the most indebted local homebuilder by this metric. Its net gearing stood at 43.2 per cent in financial year 2022, while Henderson Land Development’s was 27.5 per cent as of the end of last year, according to their financial reports.

Link Reit, Hang Lung Properties and Hysan Development also saw their gearing ratios increase in recent years, as they stepped up their capital expenditure and acquisition plans, according to Jefferies.

Hong Kong’s five biggest developers have acquired a combined total of at least HK$121.32 billion of local assets since 2020, according to a tally kept by Colliers based on data of its own and from Real Capital Analytics, the Lands Department and market sources. These acquisitions include government land, urban renewal projects, land premiums, and old buildings purchased through compulsory sales orders.

Henderson, known for frequently taking advantage of compulsory sales, has made at least 13 acquisitions worth HK$70 billion since 2020, according to Colliers’ figures. It has 27 newly-acquired urban redevelopment projects, enjoying 80 per cent to full ownership, according to its interim results.

Notable purchases by Henderson include the HK$50.8 billion Central Harbourfront Site 3 in November 2021 and the government’s Murray Road commercial plot in Central for which it paid HK$23.28 billion in May 2017.

Despite its higher gearing, New World Development ranked fourth in terms of acquisitions, at HK$11.4 billion. For instance, in May it filed an application to buy the 10 to 20 per cent it does not own of three buildings near Times Square in Causeway Bay through compulsory auction, according to Lands Tribunal documents.

In December 2018 it won a 25-year contract to design, build and run Kai Tak Sports Park with the objective to promote sport development in Hong Kong.

The cost of servicing debt is likely to hurt developers in the second half of 2022 and beyond as interest rates continue their upward trajectory, Morgan Stanley said in a report on September 19.

The Hong Kong Monetary Authority raised its base rate to 4.25 per cent from 3.5 per cent on Thursday, the sixth increase in eight months to a fresh 14-year high, in lockstep with the Federal Reserve which is battling sky-high inflation.

Henderson, Hysan and Link Reit’s interest expenses rose by 25 to 29 per cent from a year earlier after new acquisitions added to their debt piles, according to Morgan Stanley.

For New World Development, with floating debt of HK$123 billion, every 100 basis points rise in interest rate pushes up its cash interest expenses by HK$1.2 billion, the American investment bank estimated in another report on October 6.

Developers contacted by the Post sought to play down market concerns about their debt repayments.

“To say that the group’s gearing remains at a high level would be a faulty generalisation,” Henderson’s spokeswoman said.

“Over the past two years, the group’s net gearing has been managed prudently and conservatively at a moderate level of mid-20s in percentage terms.”

A significant portion of Henderson’s debt is in fixed-rate notes and bonds, and the group has arranged interest rate swaps to guard against risks related to the its borrowing, she added.

A spokeswoman for Hang Lung Properties said its net gearing is considered “stable and healthy”, at 26.9 per cent as of June 30.

“Hang Lung will continue to adopt prudent financial discipline,” she added.

New World Development said it has been taking measures to remain “resilient”.

“We have and will continue to proactively manage our net gearing ratio,” said a spokesperson for the company.

“Since FY21, we have successfully controlled capex [capital expenditure] to below our original budget. We will continue to meticulously examine every land acquisition initiative and capex item.”

Indeed, Hong Kong’s developers are unlikely to face the crisis their mainland peers are going through, because they have a higher proportion of rental income, which is less prone to risk.

“Mainland developers’ rental income from investment properties occupies less than 10 per cent, maybe just 5 per cent, of their profit on average,” said Cheng. “The investment property rental income of Hong Kong developers makes up 40 to 50 per cent of profit on average.”

Still, their profitability will undoubtedly be hurt.

Morgan Stanley said it cut its estimates for New World’s earnings per share by 35 per cent and 47 per cent for the financial years of 2023 and 2024, respectively. This mainly reflected higher interest costs, lower development property bookings and a fall in investment property profit, it said in the October 6 report.

Landlords with major development plans or acquisitions may see their profitability squeezed by higher rates, according to Jefferies’ report.

Increases in borrowing costs have an effect on land prices. Expectations of interest rate rises tend to make developers less aggressive at auction.

The Urban Renewal Authority in late October awarded a redevelopment project in To Kwa Wan to Sino Land Company and China Merchants Land for HK$2.39 billion. The price per square foot at HK$8,571 was 9.8 per cent lower than the bottom end of market estimates compiled by Vincent Cheung, managing director of Vincorn Consulting and Appraisal.

The interest rate upcycle has prompted some developers to sell assets. For example, New World Development and Swire Properties have got rid of non-core assets such as car parks.

New World expects to sell around HK$10 billion of non-core assets in the next financial year.

“We will continue to dispose of our non-core assets to retain capital,” said the developer’s spokesperson.

“We’ll have over HK$8 billion of income booked from development properties in FY23. Together with an increase in our recurring income, it’ll more than offset the additional interest expense.”

Disposing of non-core assets is a part of Swire Properties’ strategy to ensure long-term growth, a spokeswoman said in a statement.

“This strategy has put us in a strong position to fuel our HK$100 billion investment plan over the next decade,” she said.

She said 72 per cent of Swire Properties’ borrowings are on a fixed-rate basis, which helps mitigate the impact of the rising interest rates.

The general offloading of assets is a good opportunity for buyers to negotiate lower prices, said Ingrid Cheh, head of Hong Kong real estate at Schroders Capital. Landlords are likely to be more open to price cuts.

Jefferies’ report on October 5 said “the interest rate is the major culprit behind recent property price weakness”.

During past rate hike cycles, the impact on house prices was not as pronounced because the magnitude and pace of the increases were smaller, while a supply shortfall acted as a counterbalance.

This time, the upcycle has coincided with a downturn in the property market.

DBS expects Hong Kong home prices to fall 5 per cent next year. Goldman Sachs, Morgan Stanley, HSBC, JLL and Colliers have all predicted a decline too.

Goldman’s predictions have been the direst. It expects home prices to plummet by 30 per cent by the end of 2023, as sharply increasing interest rates continue to pressure affordability and repel investors from the market.

The government has taken steps to try to buoy the market.

Hong Kong’s Chief Executive John Lee Ka-chiu, in his maiden policy address, announced a refund of the extra stamp duty eligible non-locals pay when buying Hong Kong homes – should they stay for seven years and get permanent residency.

The move came after developers had been lobbying the government to scrap property cooling measures as transactions were expected to fall to their lowest level in three decades.

It was met with some scepticism from property analysts, however, who said refunding the cash at a later date would not make homes any more affordable.

The outlook remains uncertain, according to Kathy Lee, head of research at Colliers.

“There are still a lot of external uncertainties including interest rate hikes and China’s economic growth,” said Lee.

Source : Yahoo!

Charts: The Rise of Dow Jones and U.S. Total Debt from 1970’s

Source : Trading Economics and FRED