BlackRock scours junk for Chinese property treasure

Asset giant seeks out riskier bonds by mainland developers in quest for better returns as funding environment improves

PUBLISHED : Saturday, 12 January, 2013, 12:00am
UPDATED : Saturday, 12 January, 2013, 4:02am

BlackRock, the world's largest asset manager, is buying more debt from lower-rated Chinese property developers as a pickup in the economy cuts junk-bond yields to the lowest in almost eight years.

Speculative-grade notes sold by the nation's companies pay an average 7.63 per cent, down 713 basis points over the past year and the lowest since March 2005, according to Bank of America Merrill Lynch indices.

The country's B-rated issuers offer 247 basis points more than their BB peers, the data show. That exceeds the 147 basis-point spread between similar United States junk bonds, according to the indices.

"The operating environment for property companies and their ability to fund themselves has improved," said Joel Kim, head of Asia-Pacific fixed income in Singapore at BlackRock, which managed US$3.67 trillion as of September 30.

"We're venturing out a little bit more into single B-rated companies within that sector where we believe the fundamentals are good enough."

Rising demand from global funds, encouraged by a seven-month increase in new home prices in the world's second-largest economy, has helped developers in mainland China and Hong Kong sell the most dollar bonds on record, according to data compiled by Bloomberg. Unrated CSI Properties and Hopson Development, graded B-minus by Standard & Poor's, both sold notes this week.

More than US$1 billion of cash flowed into emerging-market bond funds in the week to January 2, according to data provider EPFR Global. Mainland Chinese and Hong Kong developers sold US$2.8 billion of bonds this week, making this month already the busiest-ever for these borrowers, with US$4.05 billion of sales.

Garden Holdings, the developer owned by Yang Huiyan, the mainland's richest woman, and Kaisa Group, opened the dollar market for Asian issuers in the new year. Kaisa, which S&P rates four grades below investment at B-plus, received almost US$10 billion in orders for its US$500 million sale, a person familiar with the matter said.

Hopson's notes were rated CCC-plus by S&P, one notch below its corporate rating due to concern that offshore noteholders would be materially disadvantaged in the event of a default. The US$300 million bond attracted US$6 billion of demand from investors, another person familiar with the matter said.

"The reception is definitely an encouragement, especially for smaller issuers," said Jacphanie Cheung, a director of corporate credit research in Hong Kong at Deutsche Bank.

"Investor interest in Chinese property bonds remains strong because they offer relatively better yields than other sectors."

Offerings from Chinese developers this year may exceed the record US$10.2 billion of issuance in 2012, assuming debt maturing in 2013 and 2014 was refinanced this year, she said.

Private banks and retail investors are becoming an important group of buyers for Asian junk bonds, according to JP Morgan Chase. Their allocations for high-yield primary issues doubled to 30 per cent between 2010 and 2012, according to Hong Kong-based credit analysts at the lender.