Country Garden Bonds Fall on Report of Halted Project

Dollar bonds sold this week by Country Garden Holdings Co., the China developer controlled by billionaire Yang Huiyan, fell after a newspaper reported the company was ordered to halt a project amid regulatory breaches. Country Garden denied its project was involved.

The yield on the $400 million of 10.5 percent, five-year notes Country Garden sold Aug. 4 rose as high as 11.1 percent from 10.9 percent yesterday, according to Nomura Holdings Inc. prices on Bloomberg. The spread investors demand to own the notes instead of Treasuries widened to 949 basis points from 934 basis points.

China’s eastern Anhui provincial government told Country Garden to stop work on a project in Chaohu city after finding it broke several real-estate rules, Ming Pao said today, citing a government spokesman it didn’t identify. The company said in a statement that its project isn’t included in the breaches.

“This news is definitely not helping sentiment in the China property high-yield space, together with pending supply coming to the market,” said Keith Chan, a credit analyst with HSBC Holdings Plc in Hong Kong. “Investors will just ask for higher premiums if new names come to the market.”

China has tightened property lending and cracked down on speculation since mid-April on concern last year’s record $1.4 trillion of new loans fueled a property bubble that could lead to a surge in delinquent debts. The China Banking Regulatory Commission has told lenders to stress test for home prices dropping as much as 60 percent in some cities and warned some developers may run out of cash, a person familiar with the matter said this week.

Overwhelming News

The cost of protecting Country Garden’s debt rose 74.9 basis points to 799.9 basis points, according to data provider CMA. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of bonds and loans.

Investors are “a little bit overwhelmed” by the “headline news about bank stress tests” and by a potential surge in bond sales, said Feng Zhi Wei, a senior credit analyst at Standard Chartered Plc in Singapore.

Renhe Commercial Holdings Ltd., a developer of underground shopping centers in China, began meetings with bond investors in Asia and Europe on Aug. 4, according to a person familiar with the matter. KWG Property Holdings Ltd., a Hong Kong-based developer, is also arranging investor talks in Asia, Europe and the U.S. before a sale, another person said.

The Anhui government’s complaint of illegal land use relates to a golf course on property owned by the He county government that’s next to Country Garden’s project, the company said in an e-mailed response to questions from Bloomberg News. That government project was stopped and has nothing to do with the company, Country Garden said. A spokesman for He county, who only gave his last name Diao, said he had no comment.

Country Garden bought 1,770 hectares in August 2007, it said, and has started the first phase of construction.

Country Garden stock has declined for three straight days, and fell 1.6 percent today to HK$2.42.

--Henry Sanderson. Editors: Will McSheehy, Tom Kohn

To contact Bloomberg News staff on this story: Henry Sanderson in Beijing at 86-10-6649-7548 or hsanderson@bloomberg.net

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