More mainland developers face debt problems

Agile Property latest firm struggling with debt repayments with its bonds the worst in market

PUBLISHED : Thursday, 16 October, 2014, 5:51am
UPDATED : Thursday, 16 October, 2014, 5:51am

The weakest developers on the mainland are getting weaker as Agile Property Holdings became the latest company to struggle with debt repayments.

The number of publicly traded real estate firms with liabilities exceeding equity jumped to 133 out of 334, from 57 in 2007, data showed.

Notes of the Guangzhou-based Agile were the worst dollar bonds in the industry in Asia in the past month, losing 136 per cent in annualised terms, after its chairman was detained by prosecutors and it tried to extend loan maturities.

Concern was mounting that financial stress might "spill over" to builders that had a similar background or geographic coverage as Agile, Moody's Investors Service said, after home sales dropped 11 per cent in the first eight months of the year.

"Strong players will get stronger and weak players will remain weak," said Kaven Tsang, a senior analyst at Moody's. "Default risks of very small, liquidity-strapped property companies will be high."

Concerns have spread that more mainland property companies may fail to pay obligations since closely held Zhejiang Xingrun Real Estate collapsed in March under 3.5 billion yuan (HK$4.4 billion) of debt.

It will take some time before measures start to bolster property demand and help improve balance sheets, according to Viktor Hjort, the head of Asia fixed-income research at Morgan Stanley in Hong Kong.

Yield premiums on developer bonds might increase further in the meantime, he said.

"It's unlikely the government's stimulus measures will have an immediate impact on the performance of property developers given their high inventories and fairly leveraged balance sheets," Hjort said.

Agile's founder and chairman Chen Zhuolin was placed under detention by mainland prosecutors last month.

The developer is in talks with bankers to delay loan repayments after scrapping a rights offer, according to people familiar with the matter. Agile has 1.2 times more debt than equity. It was to use the proceeds of a HK$2.8 billion rights issue to help repay part of the bridge facility, which is due in December, according to CreditSights.

The fallout from Agile has dragged down other offshore dollar-denominated Chinese property bonds. The 8.25 per cent 2019 notes of KWG Property Holding fell to 93.7 cents on the dollar, the lowest since issuance in July. Guangzhou R&F Properties' 8.5 per cent 2019 bonds sank to 95.1, a seven-month low.

"I am aware that investors are cautious about Guangdong-based players and these are most impacted by Agile headlines," said Agnes Wong, a credit strategist at Nomura Holdings.

Harsh Agarwal, the head of Asia credit research at Deutsche Bank, said there might be improvement in the property market by the end of the year after the government's loosening measures.

"Sales may start recovering next year also because of a lower base this year. So there could be a case to be more constructive on this sector next year but for the rest of this year our view is still cautious and defensive," Agarwal said.