Banking & Finance

Hitting a brick wall

Chinese developers run into trouble in the bond markets


Property firms need customers

China’s real estate firms started 2020 on a high. A record number of corporate defaults last year (see WiC481) didn’t seem to have dampened investor enthusiasm for their bonds. In the first two weeks of the year at least 10 listed property firms raised HK$40.5 billion ($5.2 billion) in debt sales, the Hong Kong Economic Times calculates.

Country Garden – one of the biggest players – raised $1 billion by selling preference shares (with attractive coupons) and Sunac China raised another $540 million by tapping the same market.

China Evergrande raised even more – about $6 billion – by selling debt and preferred shares, although the more leveraged developer had to shoulder double-digit borrowing costs.

Bond investors often assume that the real estate developers are systemically important and the government won’t allow the bigger ones to fail. They were also counting on the property giants to generate healthy cashflows, viewing the residential market as relatively robust.

The trio of aforementioned companies make up three of China’s four largest property giants, reporting more than Rmb500 billion ($71.4 billion) each in home sales in 2019. China Vanke, which topped the table with Rmb631 billion in contracted sales last year, also raised Rmb9 billion this month by selling corporate bonds in the more illiquid onshore market. Despite weak sentiment, it paid a paltry coupon rate of just 2.6% – a record low for the onshore property sector.

Nevertheless, investor confidence in the sector has been spooked as the coronavirus morphs into a global pandemic. Over the past two weeks – i.e. since its bond offering was announced – Vanke’s share price in Hong Kong has fallen nearly 19%. Evergrande has fared worse, taking a nearly 40% plunge. That compares with a 10% drop in the benchmark Hang Seng Index.

Evergrande’s bonds also plunged more than 14% in a week, Hong Kong’s Apple Daily reports, pushing yields for the Guangdong developer’s three-year US dollar notes to nearly 20%. According to Caixin Weekly, the dollar bonds at other developers are under similar pressure – especially those soon to mature – as mutual funds sell down to raise cash.

Evergrande is a standout example of a developer with a highly-geared balance sheet (see WiC364). By the end of June, its total debt stood at $116 billion, of which 46% will be maturing by June this year.

The likes of Evergrande and Country Garden have been able to recoup large amounts of cash from home sales every year, with both topping Rmb500 billion in contracted sales for three consecutive years. But the situation has turned trickier since the coronavirus outbreak brought a virtual halt to property sales nationwide.

In February, 19 out of the 70 cities (as monitored by the National Bureau of Statistics) sold no new homes. Not a single home changed hands in the secondary market in 24 cities either. That’s why some analysts took Evergrande’s announcement last month that it was offering 25% discounts on its portfolio of residential projects as a warning signal that the developer needs to generate income quickly (see WiC483).

Other real estate bosses are counting on regulators to unveil a major stimulus (see this week’s “Talking Point”) that jolts China’s virus-hit economy back into life. But that could be wishful thinking as think tanks linked to the State Council have ruled out a pump-priming of the real estate sector.

Even Vanke, backed by a number of state-owned heavyweights including Shenzhen’s mass transit railway, has been feeling the financial pressure. “Survival is a real issue,” acknowledged Yu Liang, the company’s chairman this month, after reporting a Rmb51 billion drop in home sales in February and early March compared with the same period last year. “We hope to catch up on sales in the later days; the previously suppressed purchase demand will be released, but at what speed is still uncertain,” admitted Zhu Jiusheng, Vanke’s chief executive.

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