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The Upper Riverbank, a residential project by Longfor Group Holdings and KWG Group, located at 11 Muk Tai Street in Hong Kong’s Kai Tak area, on 27 September 2019. Photo: Martin Chan.

Longfor taps bond guarantee plan, sending stocks soaring amid hopes that China’s financial lifeline can save more property developers

  • Longfor’s application to issue a 20 billion yuan midterm note was accepted by the National Association of Financial Market Institutional Investors (Nafmii)
  • That made Longfor Group Holding the first among China’s private-sector property developers to tap the central bank-backed bond guarantee programme

Longfor Group Holdings Limited’s shares jumped in Hong Kong trading, after the property developer successfully tapped a bond guarantee scheme by the Chinese government for funds.

Shares of the Beijing-based developer soared by 29 per cent to close the day at a three-week high of HK$18.20.

Longfor’s application to issue 20 billion yuan (US$2.8 billion) of midterm notes was accepted on Thursday by the National Association of Financial Market Institutional Investors (Nafmii), becoming the first private-sector developer to tap the loan guarantee programme backed by the People’s Bank of China.
The programme is the crucial “ second arrow” in the Chinese government’s quiver of financial support for the nation’s beleaguered property industry, saddled with billions of dollars worth of overdue bonds, tens of thousands of unfinished homes strewn across the country and dozens of developers teetering on the brink of bankruptcy.

China developers’ stocks and bonds buoyed by hope for direct central bank support

Altogether, the Nafmii plan announced last week offers 250 billion yuan of financial support for developers to ease their liquidity crunch. The plan also provides credit enhancement by the China Bond Insurance Corporation at an annual cost of 0.8 per cent, half of the normal fee.

“We are positively surprised by the prompt reaction of Nafmii, which indicated high priority [placed on] the scheme by regulators,” said Raymond Cheng, managing director of CGS-CIMB Securities. “Longfor [took] 8 per cent of the 250-billion yuan program, which is much higher than expected. This suggests that most of the notes [may be] likely to go to private developers, versus the expectation of 20 to 30 per cent only.”

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Longfor is not the sole developer seeking the financial bailout, Nafmii said. Shares of Country Garden, a developer based in the Guangdong provincial city of Foshan and controlled by one of China’s wealthiest families, jumped 35 per cent - their biggest one-day percentage jump since they were listed in 2007 - on optimism that the Nafmii platform would help it raise funds to sate its liquidity crunch.

Country Garden said it was withdrawing its debt from ratings by S&P Global Ratings and Fitch Ratings, after the two credit-rating agencies downgraded the creditworthiness of several private developers including Country Garden and CIFI.

Nafmii’s “bond financing program demonstrates the central government’s stance to stabilize the sector amid weak market sentiment, which should help stop the downward spiral in confidence that could affect developers of higher credit quality,” said S&P’s director Ricky Tsang.

An undated photo of Longfor’s founder and chairwoman Wu Yajun. Photo: Handout

The program will provide much needed liquidity to the surviving developers, though the exact size of funding to each developer is not yet know and may only offer modest relief to their liquidity, he said in a written response today to the Post.

“Furthermore, not every developer is likely to pass the eligibility test for the program. These supportive credit facilities usually come with pledge of assets, mainly investment properties, which could prove difficult for some developers,” he added.

Nevertheless, Tsang warned that the increase in such secured funding could in turn worsen the subordination risks for the offshore USD bondholders, while Cheng noted that a recovery in sales of those real estate companies is still the key factor to watch and risks remain due to uncertainty led by the Covid-19 pandemic in the short term.