Developers warned over debts

Mainland developers' appetite for high-yield debt could create headaches this year, according to rating agency Standard & Poor's.

S&P warned in a report yesterday further bond issuance could weaken the credit profiles of companies such Evergrande Real Estate Group and Country Garden Holdings.

Since last month, developers have raised more than US$3 billion in the bond markets, S&P said.

Evergrande was among the top borrowers in international and local bond markets, raising a total of US$2.15 billion of high-yield debt paying investors between 7.5 per cent and 13 per cent so far.

Country Garden last year raised a total of US$950 million through two US dollar-denominated bond issues, paying 10.5 per cent and 11.25 per cent.

Mainland developers have been rushing to issue debt ahead of further austerity measures by the government to curb speculation.

Fu Bei, a credit analyst at Standard & Poor's, said developers such as Evergrande could face downgrades if they kept increasing borrowing while failing to meet cash sales targets.

'We are sceptical whether property developers will follow through with their plans to refinance onshore borrowings with bond proceeds,' Fu said.

'Many companies have a huge appetite for debt-funded expansion. They may be tempted to use the funds to bolster their war chests to make acquisitions while conditions are favourable.'

S&P said it had already revised the rating outlooks of Glorious Property Holdings, Kaisa Group Holdings and Renhe Commercial Holdings to negative because of their aggressive debt-funded expansion.

Rating agencies have said that the government's policies to cool the overheated property market could have a substantial impact on the credit profiles of debt-ridden mainland developers, singling out Guangdong-based Evergrande as a potential casualty.

Bond proceeds could only temporarily improve liquidity, and aggressive developers that have relied on borrowing to fund growth could be at risk as measures to cool the sector start to bite.

To curb inflation and discourage speculation in the real estate sector, Beijing has introduced various measures, including property taxes, in Chongqing and Shanghai this year.

The measures include minimum down payments and mortgage requirements for second-home purchases, and limits on the number of homes purchased in a municipality.

Developers such as Evergrande, which rely heavily on sales proceeds to service large land payments and have already projected a strong growth this year, are likely to record a slowdown in sales so they will have to seek additional funding to bridge the gap, according to a report by Moody's last month.

Moody's said Beijing was sending a strong signal that it would act if property prices continued to surge.