Cash-hungry China property developers facing new normal: double-digit bond yields

RAM Ratings said in line with the downward bias in global interest rates and the subsequent search for yields, domestic bond yields also retreated across the entire maturity spectrum and rating bands in June.

HONG KONG: Chinese property developer Times China Holdings sold a three-year bond in January at a yield of 6.25 percent.

Now it is having to offer a yield of 11 percent on a two-year bond, underscoring the drastically higher cost of financing for Chinese developers, which are being squeezed by rising U.S. interest rates, growing investor aversion to risk taking and China’s cooling property market.

Heavily indebted developer Evergrande Group, which earlier this month sold a jumbo $1.8 billion of bonds with coupons among the highest in the market, late on Monday sold an additional $1 billion of two-year bonds at 11 percent.

At the time of the $1.8 billion sale, bankers and analysts warned the high coupons offered by Evergrande would pile pressure on rival developers and push up borrowing costs all around.

That is now playing out as developers rush to market -- offering ever-higher coupons to attract investors -- before their offshore borrowing quotas expire at the end of the year.

Developer Agile Group sold a three-year bond in July at a yield of 8.5 percent, but last week paid 9.5 percent for $400 million in two-year bonds, rated BB by S&P.

Greenland Holdings also tapped the market this week, selling a 1.5-year $200 million bond at a yield of 9.25 percent on Monday, according to a term sheet seen by Reuters.

That compares with a one-year bond it sold in June with a yield of 7.875 percent.

Only 15 companies across Asia-Pacific have paid double-digit rates for bonds of at least $100 million with similar tenors in the past two years, according to Refinitiv data. Twelve of those are Chinese property developers.

“If you’ve got 25 people in a room wearing purple you’d feel a bit less embarrassed about wearing purple,” said a senior debt capital markets banker about the high yields.

The re-pricing comes as developers face a combined $96.1 billion of both onshore and offshore bonds maturing next year, according to Refinitiv.

Bankers say it has become increasingly difficult to get deals done, as investors demand higher premiums in return for buying junk bonds and shy away from longer-dated issues.

And the higher yields push down the prices of existing bonds, making 2018 an extremely bad year for investors.

“The large new issue concessions continue to re-price secondary, in what is already the worst year for investors since 2011,” Owen Gallimore, corporate credit analyst at ANZ, wrote in a note last week.

Times China’s January bond is now trading at 90.8 cents on the dollar, while Agile’s July bond is down to 96.6, pushing the yields to 11.16 percent and 9.94 percent, respectively.

“The market price has moved quite a bit this year,” said Steve Wang, senior credit analyst at CITIC CLSA.

A slowdown in broader economic momentum is feeding through to parts of the property sector, a key driver of gross domestic product. In the third quarter, China’s economy expanded at its weakest pace since the global financial crisis.

Growth in China’s real estate investment in October slowed to a 10-month low and home sales fell again, as developers held back expansion plans in the face of softening conditions. - Reuters

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