Chinese developers sinking into disguised debts

Chinese developers' indebtedness is worse than shown in their interim results as a rising number of issued perpetual bonds, and limited disclosure on their terms, are adding to investors' concerns about their financial health at a time when the sector is struggling with an industry downturn.

When Evergrande, one of the mainland's top 10 developers, announced the issuance of such securities last year, it did not attract much attention.

But as the market downturn kicked in and more developers, including Greentown, Fantasia and Kaisa, issued such bonds this year, investors wanted to know more but got worried when they failed to find full disclosure by issuers, particularly about interest rates and redemption terms.

Although all developers put perpetual securities as equity in their interim reports, Moody's has taken the opposite tack.

"They have debt-like features," said Franco Leung, the global ratings agency's senior property analyst. "Developers will redeem them at some point."

Until the end of June, Evergrande had the highest amount of perpetual securities among all developers at 44.5 billion yuan (HK$55.9 billion), followed by Guangzhou R&F at 15.6 billion yuan, Agile at 4.5 billion yuan, Greentown China at three billion yuan, Kaisa at one billion yuan and Fantasia at 700 million yuan.

If perpetual bonds are counted as debts instead of equity, the net gearing ratio of Evergrande will rise above 100 per cent, instead of the 89.6 per cent it announced this week.

Greentown chief executive Shou Bainian shrugged off worries about higher indebtedness than its reported net gearing ratio of 78.1 per cent at the end of June, which itself was up from 60.1 per cent at the end of last year. "I think debt ratio is one aspect to measure a company's financial health. [Investors] also need to look at its debt structure and turnover," Shou said.

"Some developers have tens of billions of outstanding perpetual securities. It was regarded as a kind of innovation when [perpetual bonds were] first issued [by mainland developers]. But we all know that the interest rate will soar, from the fifth year on, to a very high level, although the securities are listed as equity," said Xu Hanping, chief financial officer of mainland developer Cofco Land.

Knowing that, Xu said her company would not exclude the possibility of issuing perpetual bonds in the future, although it is in a net cash position.

The perpetual securities are costing Evergrande dearly. Its profit attributable to holders of perpetual capital instruments reached 1.9 billion yuan in the first half, compared with seven billion yuan attributable to shareholders of the company, according to the first-half earnings report.

Chief financial officer Tse Wai Wah said that the average cost of perpetual bonds is between 9 per cent and 11 per cent per annum and the proceeds are used to pay for Evergrande's land acquisitions in first-tier cities.

"Our debt ratio in the short term is a bit high," Evergrande's chairman Hui Ka-yan said. "As we have finished our national expansion now, the budget for land purchases will [be] reduced sharply in the future."