Developers see trust finance as debt option
Sandy Li and Wong Ka-chun
Mainland developers are looking at the possibility of raising quick funds through so-called 'trust financing plans' - a type of borrowing that has less stringent requirements than bank loans and corporate bonds but carries higher interest rates.
Greentown China Holdings raised 1.8 billion yuan (HK$1.34 billion) recently by issuing 2 billion trust units for two uncompleted projects in Hangzhou and Wuxi, a move that other property firms may follow.
The term of Greentown's trusts is three years and the loan bears an annual interest rate of 14 per cent.
That is far higher than the 5 to 6 per cent interest banks charge for project loans, but they prefer lending to financially sound big developers.
Meanwhile, corporate bond sales require securing a credit rating of at least AAA and the approval of the China Securities Regulatory Commission.
Greentown's ratings were far lower. Moody's Investors gave it a negative rating outlook, a 'Caa1' corporate family rating and a 'Caa2' senior unsecured bond rating.
This made it difficult for the firm to meet tough requirements imposed by banks at home and overseas, or to seek approval to issue corporate bonds.
But a trust financing plan simply requires a company to package its projects using them as collateral for the loan. Banks then sell these units to institutional investors such as insurers and private equity funds.
Market watchers believe the scheme will be a potential fund-rasing outlet for small developers and property firms that fail to secure credit ratings that meet banks lending requirements.
Lawrence Hui Wai-man, the chief financial controller at Shimao Property Holdings, said the firm had been approached by investment banks about using trust financing for funds.
'Bankers are pitching the proposals not only to us but to other developers as well. We will explore [the possibility],' he said.
Trust financing's higher interest cost was a major consideration, he said. Banks only charge an annual interest rate of 5 per cent for a two-year project loan. Trust financing plans have to offer 10 per cent to 14 per cent to attract investors.
Even so, a trust financing plan offers a fast and convenient channel for private developers to seek funding.
Mr Hui said major domestic banks such as the People's Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China, and China Construction Bank have launched an aggressive campaign to expand their loan business.
State-owned developers could be future targets for trust financing, said Mr Hui.
Michael Wu, a director in the Asia-Pacific corporate division of Fitch Ratings, said it would not be surprising to see cash-strapped firms opt for loans with higher interest rates.
For example, Greentown had a 140 per cent gearing - a level banks consider as high credit risk, he said.
Instead of extending syndication loans to the highly leveraged company, lenders would be more willing to act as trustees for a specific quality project in a good location, according to Mr Wu.
Because the specific project would be used as collateral, it would reduce a bank's risk.
However, Mr Wu doubted the popularity of trust financing because mainland banks had relaxed their lending policies and were in a low-interest rate environment.
Trust plans have less strict terms but higher rates than bank loans
Greentown China raised 1.8 billion yuan in trust issue at annual interest rate of: 14%