Tuesday, June 1, 2010

China property firms' dollar bonds take a hit

Fears that the real-estate market is overheating weigh on performance

(HONG KONG) Dollar bonds sold by China real estate companies this year are the worst performers among Asian non-financial corporate debt denominated in the US currency amid concern that the nation's property market is overheating.

Yields on the US$3.9 billion of bonds issued by Kaisa Group Holdings Ltd, Country Garden Holdings Co and seven other developers since January widened by an average 2.26 percentage points relative to Treasuries as of last week, according to data compiled by Bloomberg. That's more than the 2.05 percentage point increase in spreads for the seven dollar-denominated bonds sold by other companies in Asia outside Japan.

Investors are demanding greater yields to lend to China property firms, a sign they expect borrowers will have a harder time meeting debt payments amid a government clampdown down on lending. Goldman Sachs Group Inc and Credit Suisse Group AG cut their profit estimates for Chinese real estate companies after a 12.8 per cent jump in real estate prices in April from a year earlier spurred the state to increase regulation.

'New issues by Chinese developers will stall for the time being,' said Vince Chan, the Hong Kong-based chief credit strategist with Amias Berman & Co LLP, a fixed-income advisory and brokerage firm founded by two former Citigroup Inc bankers. 'Investors need handsome rewards for getting exposed to weaker fundamentals.'

The amount of dollar bonds issued by China developers represents 45 per cent of all corporate dollar debt sales in Asia outside Japan this year, Bloomberg data show. The yield spread on US$350 million of 13.5 per cent notes sold by Shenzhen-based Kaisa last month widened the most of the nine issues, expanding to 16.52 percentage points from 11.07 percentage points, Nomura Holdings Inc prices on Bloomberg show.

Kaisa is developing 18 projects in Shenzhen, Dongguan and other cities in the Pearl River Delta, most of them high-rise residential complexes that combine recreational and commercial space, according to its website. An investor who bought the company's 2015 bonds at par would have lost 15.5 per cent.

Elsewhere in credit markets, the extra yield investors demand to own company debt instead of Treasuries widened 5 basis points last week to 193 basis points, or 1.93 percentage points, Bank of America Merrill Lynch index data show. The spread, which peaked at 511 on March 30, 2009, is up from this year's low of 142 on April 21. Average yields rose to 4.06 per cent, the highest based on weekly closes since the period ended on March 5.

Corporate bond issuance worldwide slowed this month to US$66.1 billion, down from US$183 billion in April and the least since December 2000, according to data compiled by Bloomberg.

'Companies have to be prepared to strike and strike quickly,' said Rick Martin, the London-based director of treasury at Virgin Media Inc, the UK's second-largest pay-television company, at a May 28 briefing in London. 'The key is to have the team ready and primed and able to pull the trigger at short notice. I can't think of a time when the forces have been so polarising.'

The cost to insure US corporate debt against default rose last week. Credit-default swaps on the Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses or to speculate on creditworthiness, increased 25.1 basis points this month to a mid-price of 117.2 basis points. The index typically rises as investor confidence deteriorates and falls as it improves.

Bond risk rose in Asia yesterday, with the Markit iTraxx Asia index up four basis points, according to Royal Bank of Scotland Group Plc. The Markit iTraxx Japan index rose 5 basis points, Morgan Stanley prices show.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a credit-default swap contract protecting US$10 million of debt from default for five years is equivalent to US$1,000 a year.

In emerging markets, spreads narrowed 16 basis points last week to 321 basis points, trimming the monthly increase to 63, according to the JPMorgan Emerging Market Bond Index.

China has added to regulations designed to cool the property market several times this year, including raising banks' reserve requirements three times since January, restricting pre-sales by developers and curbing loans for third- home purchases. It also raised minimum mortgage rates and tightened down-payment requirements for second homes.

Shanghai's plan to begin a property tax on residential real estate was submitted to the central government for review, the China Securities Journal reported yesterday, citing unidentified people.

Goldman Sachs lowered its 2010 net income estimates for Chinese developers by an average 13 per cent and reduced earnings forecasts for the next two years by 25 per cent, analysts led by Yi Wang wrote in a May 19 report. Credit Suisse pared earnings- per-share estimates by as much as 15 per cent for 2010 and 20 per cent for 2011, citing the government's clampdown.

'With the negative headlines coming out of this sector, investors are less likely to be drawn to participate in new issues because of a high coupon,' said Tan Chew May, a credit analyst for Aberdeen Asset Management Asia Ltd., which oversees US$1.5 billion of Asian dollar debt, in Singapore. 'With the trend of widening spreads, new names are forced to come at premium.'

China property developers paid coupons as high as 14 per cent to issue dollar debt this year, compared with an average 9.2 per cent for other companies in Asia and 6.2 per cent for US property companies. On average, Chinese property companies are paying a 10.875 per cent coupon.

Glorious Property Holdings Ltd, which has 26 real estate projects in cities including Shanghai, Beijing, Harbin and Changchun, postponed its first sale of dollar-denominated bonds in April. The Hong Kong-listed company cited poor credit market conditions for the delay.

Renhe Commercial Holdings Co, a developer of underground shopping centres based in Harbin, China, sold five-year, 11.75 per cent dollar notes on May 18 to yield 974 basis points more than Treasuries after delaying the sale for two weeks.

The relatively strong finances of China developers means some companies can afford to pay double-digit coupons, according to Andy Mantel, Hong Kong-based founder of hedge fund manager Pacific Sun Investment Management Ltd.

Country Garden, which builds villas, townhouses and apartments in China, sold bonds in April with an 11.25 per cent coupon. The company, controlled by China's second-richest woman, Yang Huiyan, said contracted revenue in the first quarter rose 82 per cent on sales in the Guangdong area. -- Bloomberg

Source: Business Times, 1 Jun 2010

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