Developers' Bonds in China Turn Sour as Investors Demand Higher Yields

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UPDATE: Developers' Bonds in China Turn Sour as Investors Demand Higher Yields

Posted by Alex Finkelstein 06/02/10 12:47 PM EST
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Bonds sold recently by developers in China are not generating the yield most global investors anticipated - a sign that some developers may have trouble meeting near-future debt payments, industry analysts speculate.

"New issues by Chinese developers will stall for the time being," Vince Chan, the Hong Kong-based chief credit strategist with Amias Berman & Co. LLP, told Bloomberg BusinessWeek. "Investors need handsome rewards for getting exposed to weaker fundamentals

Dollar bonds sold by China real estate companies this year are the worst performers among Asian non-financial corporate debt, Bloomberg reports. The latest bond numbers again show China's property market is overheating.

China's real estate market problems are worse than those in the United States before the global downturn, central bank adviser Li Daokui has warned.

"It is more than just a bubble problem," Li says. He is a member of the People's Bank of China's monetary policy committee.

"The housing market problem in China is actually much, much more fundamental, much bigger than the housing problem in the US and United Kingdom before your financial crisis," he told London's Financial Times.

MediaCorp Press Ltd. in Beijing reported Li told the Financial Times that recent moves by the Chinese government to rein in the property market needed to be part of a long-term push to bring high prices under control.

The high cost of housing could hamper future growth by slowing urbanization, he said, adding that rising prices might become a political flashpoint, especially among younger people unable to afford their own homes.

China recently introduced a range of measures to forestall a property bubble, including tightened restrictions on pre-sales, higher minimum down payments for second homes and new curbs on loans for third home purchases.

The measures appear to have the desired effect, with preliminary data showing property sales in Beijing, Shanghai and Shenzhen falling as much as 70 per cent in May from April as developers held back launches.

Real estate prices in 70 Chinese cities had jumped 12.8 per cent in April, the fastest year-on-year rise for a single month in five years.

Yields on the $3.9 billion of bonds issued by Kaisa Group Holdings Ltd., Country Garden Holdings Co. and seven other developers since January widened by an average 2.26 percentage points relative to Treasuries as of last week, according to data compiled by Bloomberg.

That's more than the 2.05 percentage- point increase in spreads for the seven dollar-denominated bonds sold by other companies in Asia outside Japan.

Goldman Sachs Group Inc. and Credit Suisse Group AG cut their profit estimates for Chinese real estate companies after a 12.8 percent jump in real estate prices in April from a year earlier spurred the state to increase regulation.

The amount of dollar bonds issued by China developers represents 45 percent of all corporate dollar debt sales in Asia outside Japan this year, Bloomberg data show.

The yield spread on $350 million of 13.5 percent notes sold by Shenzhen-based Kaisa last month widened the most of the nine issues, expanding to 16.52 percentage points from 11.07 percentage points, Nomura Holdings Inc. prices on Bloomberg show.

Kaisa is developing 18 projects in Shenzhen, Dongguan and other cities in the Pearl River Delta, most of them high-rise residential complexes that combine recreational and commercial space, according to its website. An investor who bought the company's 2015 bonds at par would have lost 15.5 percent.

China has added to regulations designed to cool the property market several times this year, including raising banks' reserve requirements three times since January, restricting pre-sales by developers and curbing loans for third- home purchases. It also raised minimum mortgage rates and tightened down-payment requirements for second homes.

Shanghai's plan to begin a tax on residential real estate was submitted to the central government for review, the China Securities Journal reported.

China Clampdown

Goldman Sachs lowered its 2010 net income estimates for Chinese developers by an average 13 percent and reduced earnings forecasts for the next two years by 25 percent, analysts led by Yi Wang wrote in a May 19 report. Credit Suisse pared earnings- per-share estimates by as much as 15 percent for 2010 and 20 percent for 2011, citing the government's clampdown.

"With the negative headlines coming out of this sector, investors are less likely to be drawn to participate in new issues because of a high coupon," Tan Chew May, a credit analyst for Aberdeen Asset Management Asia Ltd., which oversees $1.5 billion of Asian dollar debt, told Bloomberg in a phone interview from Singapore. "With the trend of widening spreads, new names are forced to come at premium."

China property developers paid coupons as high as 14 percent to issue dollar debt this year, compared with an average 9.2 percent for other companies in Asia and 6.2 percent for U.S. property companies. On average, Chinese property companies are paying a 10.875 percent coupon.

Glorious Property Holdings Ltd., which has 26 real estate projects in cities including Shanghai, Beijing, Harbin and Changchun, postponed its first sale of dollar-denominated bonds in April. The Hong Kong-listed company cited poor credit market conditions for the delay.

Renhe Commercial Holdings Co., a developer of underground shopping centers based in Harbin, China, sold five-year, 11.75 percent dollar notes on May 18 to yield 974 basis points more than Treasuries after delaying the sale for two weeks.

Andy Mantel

The relatively strong finances of China developers means some companies can afford to pay double-digit coupons, Andy Mantel, Hong Kong-based founder of hedge fund manager Pacific Sun Investment Management Ltd., told Bloomberg.

Country Garden Holdings, which builds villas, townhouses and apartments in China, sold bonds in April with an 11.25 percent coupon. The company, controlled by China's second-richest woman, Yang Huiyan, said contracted revenue in the first quarter rose 82 percent on sales in the Guangdong area.

"The sector is relatively better financed than it was two years ago when there were serious liquidity issues," Mantel said in a phone interview. "Investors might not make any money on the actual bond, but they'll get their interest payments."

Fantasia Holdings Group Co.'s $120 million of five-year bonds pay the highest coupon at 14 percent. The company develops commercial and residential complexes in China's Pearl River Delta and Chengdu-Chongqing Economic Zone regions.

It raised HK$3.18 billion ($408 million) from an initial share sale in Hong Kong in November, boosting cash reserves to $497 million from a deficit, Bloomberg data show.

"Sales and pre-sales have increased cash balances for most companies by over 20 to 30 percent while fresh debt issuance has extended maturity profiles," analysts led by Raghav Bhandari at CreditSights Asia Research Ltd. wrote in a note to clients May 20. "Companies are in a much better position to handle this period of strain than they were a year ago."

Chinese property bonds are unlikely "to recover meaningfully anytime soon," Amias Berman's Chan said.

"If we start to see the regulatory measures taking effect in the next few months then there may be a reversal of fortunes. But optimistically I think it'll be the third or fourth quarter before things stabilize."

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