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 Bond buyers are shying away from second-tier developers because
property sales have cooled as the economy slows. The expected
bankruptcy of a local developer and the country's first domestic
bond default this month have heightened scrutiny of borrowers.
The property companies have a renewed sense of urgency to raise
capital after U.S. Federal Reserve Chairman Janet Yellen indicated
the central bank, which sets the tone globally for borrowing costs,
may raise interest rates as early as the spring of 2015, sooner than
many investors had anticipated. Higher rates mean higher borrowing
costs, both for the companies and for their home-buying customers.
Highlighting the search for alternative funding avenues, property
fund MWREF Ltd earlier this month issued the first cross-border
offering of commercial mortgage-backed securities (CMBS) since 2006.
The offer was priced at a yield lower than two dollar bonds issued
last week, IFR, a Thomson Reuters publication, said.
"The market will see more of these products," said Kim Eng
Securities analyst Philip Tse in Hong Kong. "It's getting harder to
borrow with liquidity so tight in the bond market. It's getting
harder for smaller companies to issue high-yield bonds."
The notes, issued through a MWREF subsidiary, Dynasty Property
Investment, were ultimately backed by rental income from nine MWREF
shopping malls in China and were structured to give offshore
investors higher creditor status than is normally the case with
foreign investors. MWREF is managed by Australian investment bank
Macquarie Group Ltd <MQG.AX>, which declined to comment.
The head of investor relations for Beijing Capital Land <2868.HK>,
which is mainly focused on middle- to high-end residential
development and high-end commercial property, said the company would
look at new ways to fund its business.
Beijing Capital was the first Hong Kong-listed developer to issue
dollar senior perpetual capital securities last year, an equity-like
security that does not dilute existing shareholders.
"As market liquidity is changing constantly, we have to keep
adapting and exploring different funding channels," said Bryan Feng,
the head of investor relations.
Chinese regulators last week allowed developers Tianjin Tianbao
Infrastructure Co. <000965.SZ> and Join.In Holding Co. <600745.SS>
to offer a private placement of shares, opening up a fund raising
avenue that had been closed for nearly four years.
New rules were also unveiled last week allowing certain companies to
issue preferred shares, including companies that use proceeds to
acquire rivals.
"As liquidity tightens and developers see more pressure...they may
consider M&A via preferred shares," said Macquarie analyst David Ng.
FINANCING RISKS
Heightened fears over the outlook for China's property developers
were triggered by news this month that home price inflation is
cooling and that Zhejiang Xingrun Real Estate Co, based in eastern
Zhejiang province, was on the brink of bankruptcy.
China also recorded its first domestic bond default when loss-making
Shanghai Chaori Solar Energy Science and Technology Co Ltd
<002506.SZ> failed to make an interest payment, raising doubts about
the assumption high-yield debt carried a government guarantee.
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The market jitters have slowed the pace of new debt issuance and
prompted investors to demand bigger premiums to risk their capital.
As of March 15, Chinese developers had issued 15 U.S. dollar bonds
raising $7.1 billion so far this year, compared with 23 issues that
raised $8.1 billion in the year-earlier period.
"That said, quite a number of developers have demonstrated the
ability to access alternative markets, such as the offshore
syndicated loan markets as another means of raising capital," said
Swee Ching Lim, Singapore-based credit analyst with Western Asset
Management.
Offshore syndicated loans for Chinese developers have reached $1.17
billion so far in 2014, compared with $9.8 billion for all of last
year, Thomson Reuters LPC data shows.
Demonstrating the change in investor sentiment, bonds issued by
Kaisa Group in January with a yield of 8.58 percent are now yielding
9.5 percent. The company did not immediately respond to a request
for comment.
Times Property issued a 5-year bond this month, not callable for 3
years, to yield 12.825 percent. A similar instrument from China
Aoyuan Property <3883.HK> in January was priced at 11.45 percent.
Both Kaisa and Times are in the B-rating "junk" category, which is
four notches above a default rating.
Property prices on the whole are still rising, but there are signs
of stress in second and third tier cities.
Early indications of property sales in March, traditionally a high
season, were not promising, although final figures for the month
would not be available until April, said Agnes Wong, property
analyst with Nomura in Hong Kong. That may mean developers have to
cut prices and investor sentiment may worsen.
"This is hurting the cash flows of the smaller players," she said.
The market stresses ultimately could lead to the reshaping of the
property development sector, said Kenneth Hoi, chief executive of
Powerlong Real Estate Holdings Ltd <1238.HK>, a mid-sized commercial
developer.
"In the future, only the top 50 will be able to survive," he said
during a briefing on the company's earnings on March 13. "Many small
ones will exit from the market."
(Additional reporting by Nethelie Wong at IFR;
editing by Emily
Kaiser and Neil Fullick)
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