China developers face tough sell raising funds as recent defaults send chill through corporate bond market

Defaults on onshore loans by mainland Chinese companies have triggered alarm among investors, igniting concerns that heightened risk aversion by creditors could affect the outlook for Chinese developers, who accounted for the lion’s share of local debt issuance last year.

About 40 per cent of corporate bond issuance in China in 2015 was done by property developers, spurring concerns the sector will face difficulties raising additional funds this year, even as they enjoy robust liquidity thanks to an upturn in the property market.

About 1 trillion yuan (HK$1.2 trillion) in corporate bonds were issued on the mainland in 2015.

In late 2014 property developers were allowed to issue new debt, as Beijing reversed its earlier ban on fund raising that was imposed as part of measures to help cool the property sector.

Alan Jin, a property analyst at Mizuho Securities, said mainland property developers shouldn’t be seen as a major credit risk in 2016.

Property sales in the first quarter totalled 600 billion yuan, exceeding the sector’s total corporate bond issuance of 400 billion yuan in 2015, he said.

“It implies that even if no more corporate bonds are issued for the rest of the year, developers would continue to have a higher cash inflow, all else held constant,” Jin said.

However, he cautioned property developers were not immune to problems as China’s economy cools.

“That said, we still view this as a meaningful risk for the sector,” Jin said.

Last month Caixin reported that Yunfeng, a 20.5 per cent-owned affiliate of China’s major developer Greenland Group, was in default on 2 billion yuan of privately placed notes in January.

Defaults by Chinese state-owned enterprises have accelerated following the first onshore SOE corporate bond default by Baoding Tianwei in February.

Two other SOEs have since missed bond payments while a third has had trading of its notes suspended, according to ratings agency Fitch.

These incidents were on top of a number of onshore corporate bond defaults by private-sector firms this year, the ratings agency said.

Fitch said the recent defaults from both the private sector and SOEs could have contributed to a spate of cancellations of bond issues in March and April.

Jin said these defaults exposed the immature status of the bond market, which is loosely regulated and dominated by amateur investors.

“Many investors in China are buying these bonds on the assumption that the underwriters normally banks or government will step in to clean up the mess in the event of default,” said Jin.

This has resulted in a bizarre situation where the spreads among sovereign bonds, investment grade corporate bonds and junk bonds are unusually narrow, said Jin.

He expected increased risk awareness among investors leading to higher funding cost for companies.

In March, corporate bonds issued by developers were yielding 5.1 per cent, nearly one percentage point lower than the 6.1 per cent in September 2015.

“It is becoming difficult to issue domestic bonds as investors are increasingly worried about credit risks,” said David Hong, head of research at consultancy China Real Estate Information.

Hong said most big developers with good ratings have already issued onshore bonds. Much of the current bond issuance is by developers of lower credit quality, he said.

He added that investors have become more risk adverse.