China developers return to bond market
Developers are preparing deals again after Zhejiang Xingrun's default rattled nerves
Mainland property developers are back into bonds in a major way after a pause in the wake of a default.
Shui On Land is in the market with a two-tranche bond of "benchmark" size, which comes on top of an exercise to exchange US$1.44 billion-equivalent of notes due 2015 for a new batch of securities due in 2018 and 2020.
Country Garden is sounding the market on an offshore offer, expected to be at least US$500 million, and China Chengtong Development is preparing its own deal. China Overseas Land and Investment on Tuesday priced a US$1 billion two-tranche bond. Yanlord priced a S$400 million (HK$2.47 billion) three-year deal on the same day.
It is a remarkable comeback for a market that effectively shut down following the default of Zhejiang Xingrun Real Estate on 3.5 billion yuan (HK$4.4 billion) of domestic bank loans and other debt, in March.
Beijing has had a difficult time with property developers, floating policy after policy to deflate flat prices, occasionally taking the developers to the edge of solvency. The view in the past was that the government would back off to prevent any bankruptcies.
However, after it let one developer go bust, investors became concerned it might let many others follow that path. This came against the backdrop of weak economic data and a clampdown on shadow banking, which previously supplied much of the capital the developers needed.
"There is a lot of bearishness about China. You have concerns about trust loans and China's economy with a string of weak PMI [purchasing managers index] data and with the government coming out with a 7.5 per cent gross domestic product target with no bottom limit. All this has an impact on investors," said Zhiwei Feng, a senior credit analyst with Standard Chartered.
The rating agencies have issued a steady stream of reports flagging the sector's risks. On Tuesday, Standard & Poor's downgraded Evergrande to BB-minus from BB with a negative outlook.
Moody's this month downgraded property developer Zhong An Real Estate to B3, from B2, flagging its refinancing risks.
Of the bond markets tracked by JP Morgan Asia Credit indices, China is the only Asian market to have gone down in the past 12 months. This is largely due to the property sector, with the price for bonds issued by single B credits down about 7 per cent to 10 per cent from past months.
Stresses are also building in the system. Nanjing Fudi Property Developing failed to repay a 90 million yuan loan that was due in April, wrote Nomura economist Zhiwei Zhang in a note. Zhang added that, in March, Guizhou Anrui Property obtained a six-month extension on a 30 million yuan loan, and in February, Huaian Hongkang Property gained a six-month extension on a 50 million yuan loan.
"People worry about oversupply and systemic risk. Especially for developers that focus on third and fourth-tier cities," said Sean Chan, head of Asian debt investment at Baring Asset Management.
However, investors and bankers also believe this market is normalising.
David Yim, head of North Asia debt capital markets, RBS, said investors are following a well-travelled pattern seen after every sell-off. First, they stay out of the market, accumulating cash. Next they buy a deal or two from the best names in the sector. If these trade well, they dive back in, buying the weaker names.
On April 17, the state-backed, investment-grade Poly Real Estate Group sold US$500 million of bonds that traded well.
The other names coming to the market are bigger and better rated. China Oversea is investment grade. Country Garden and Yanlord are on the cusp of investment grade, and the China Chengtong Development deal will be guaranteed by Agricultural Bank of China, making it investment grade.
Investors are coming back on the view the market was oversold in March. Single-B-rated China property credits were yielding in the high tens to double-digit range, said Gordon Ip, a fund manager for Value Partners, who is buying property bonds.
"I feel more comfortable today than at the beginning of the year. I was at a 10 per cent cash holding at the beginning of the year; now it's low single digits."
There is also a view that investors panicked in March, particularly as mainland developers have reported good earnings.
"The natural reaction was to sell first and ask questions later," Ip said.