Fitch attempts to allay fears

PUBLISHED : Sunday, 30 March, 2008, 12:00am
UPDATED : Sunday, 30 March, 2008, 12:00am

Fears that bonds issued by mainland property developers will be downgraded have been denied by Hong Kong-based Tony Stringer, managing director and head of Asia-Pacific corporate ratings at rating agency Fitch.

Increasing concerns over the status of the property market have caused the bid-offer spreads of bonds issued to widen. Reduced appetite for these bonds has caused sellers to give away greater spreads to attract potential buyers.

'We don't have any concern on any of those property bonds that have been rated,' Mr Stringer said. 'The companies have locked in their funding for about five years. As long as they manage their business sensibly there will not be an immediate liquidity problem.'

Mr Stringer said the widening of spreads did not reflect the fundamentals of the companies concerned. 'At present, anybody who wants to trade any secondary paper has to give away a lot of bid-offer spreads if they want to sell,' he said. 'Fitch's view that the spread is overdone does not necessarily reflect the underlying fundamentals of individual companies. But the market is gripped by fear. It's not behaving rationally.'

Early last year, some issuers offered a 7.5 to 8 per cent [interest in] coupons and, as the year went on, the rates were pushed up to about 10 per cent. 'Now the market is effectively shut because nobody is allowed to issue,' Mr Stringer said.

The par amount, which is the initial size of issuance of bonds from the mainland property sector, is US$4billion, of which US$1.5billion was issued last year, according to Becky Liu, an associate at HSBC's credit research team. The rest was issued mostly in 2006. The difference between the bid price, at which the holder can sell shares, and the offer price, at which the purchaser can buy shares, of these bonds has increased significantly. 'The simple average spread of the sector has gone from 637 basis points (bid) as of November 20, last year to 1,143 basis points as of March25,' she said.

Ms Liu said the illustrated calculation of the spreads had included three issues from Road King Infrastructure, the largest issuer with outstanding issuance of US$550million. Other major issuers are Agile and Greentown, each with US$400million.

Mounting pressure in the United States to sell credits and growing concerns about the mainland's property market had caused the bid-offer spreads to widen even more in the past three months, analysts said. A US dollar-denominated bond issued by property developers in the mainland typically has a five-year maturity.

The central government has curbed banks' lending to restrain expansion in order to ease inflation. The government is especially keen to rein in a bourgeoning housing market, which has seen prices of homes in some cities triple over the past three years. Some analysts have said the mainland appeared to be suffering from a liquidity squeeze similar to more developed economies.

Mr Stringer believes that the measures taken by the central government are aimed at slowing down growth in the property market rather than simply tightening corporate credit. He said that Fitch had no plans to downgrade any of the bonds that had been issued.

'Moreover, the property developers will fund their projects partly through pre-sales to homebuyers so they are not going to be totally reliant on bank lending.'

Mainland institutions are having a hard time allocating their assets now with rising volatility in the equity market. China Life Insurance, the mainland's largest insurer, indicated that it would offload some equity holdings in favour of bonds.

Apart from property bonds, other corporate issued bonds might be available to absorb the liquidity moving in from equities. But the liquidity might only be available for a short while before new measures implemented by the People's Bank of China (PBOC) to increase reserve ratios, according to Frances Cheung, fixed income strategist at Standard Chartered Bank. She said while there was enough liquidity in the market for more bonds issuance, further measures were likely to be taken by the PBOC to increase interest rates and reserve ratios. 'Banks are under straight loan quotas so there will be some idle funds coming from these banks as well, and yes they can pour streams of liquidity into bonds.

'Many funds in China have suffered from equity sell off and unfortunately this has included Qualified Domestic Institutional Investor funds launched last year. This could draw capital flow from the equity market to the bond market,' she said.

Ms Cheung expects the interest hikes to lock up some of that liquidity. 'We expect the PBOC to increase the reserve ratio for Chinese banks from 15.5 per cent to 18 per cent by the end of this year,' she said. 'This could lock up about 1trillion yuan (HK$1.11trillion) of funds from banks which signals a withdrawal of liquidity.'