China Property Bonds Rebound on Record Sales: Credit Markets
Bonds issued by China developers are rebounding from their worst first half in two years as a record $6.8 billion in offshore debt sales spurs confidence the borrowers have the resources to weather a slowing economy.
All but one of the eight dollar bonds sold between January and June have recovered at least 75 percent of their losses, according to prices from BNP Paribas SA, ING Groep NV, Nomura Holdings Inc. and Royal Bank of Scotland Group Plc. Country Garden Holdings Co.’s 11.25 percent notes due 2017 trade at 102.5 cents on the dollar, up from 87 cents in May. New World Development Ltd.’s 7 percent bonds due 2020 fetch 104.95 cents, compared with a low of 97.15 cents in June.
Profits for Chinese developers are rising at the same time slowing house-price growth eases concern regulators will enact more measures to cool the market. Agile Property Holdings Ltd., which builds condominiums in 22 cities and regions, reported an almost five-fold increase in first half profit on Aug. 20.
“Most of the property companies’ liquidity is still in good shape,” said Iris Chan, senior credit analyst with HSBC Global Asset Management in Hong Kong. “The big companies don’t have a problem with sales, and although prices have decreased the volume is still there.”
Agile’s 8.875 percent bonds due 2017 traded at 101.5 cents today, after plunging to 86 cents on May 25 as government initiatives to slow property inflation took effect. The measures included a ban on loans for third-home purchases and higher mortgage rates.
The $6.8 billion of bonds sold this year is the most since Bloomberg began compiling data in 1999 and more than four times the $1.62 billion issued in 2007, the next biggest year on record. Some $4.4 billion was raised in the first half, a period when the developers’ bonds had their worst performance since the credit crisis in 2008, Morgan Stanley data show.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt widened for a second week, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yield spreads expanded 1 basis point to 179 basis points, or 1.79 percentage points. The gap has ranged this year from a low of 142 basis points in April to as high as 201 in June. Yields jumped to 3.595 percent from 3.535 percent.
The cost of protecting European and Asian company debt from default fell to the lowest level in almost a month as concern eased the U.S. economy is sliding back into recession. Corporate bond issuance surged 34 percent to $46.5 billion worldwide, according to data compiled by Bloomberg.
The Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings dropped 1.5 basis points to 103.75, according to JPMorgan Chase & Co. at 9:30 a.m. in London. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 7.5 basis points to 118, Royal Bank of Scotland Group Plc prices show.
Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. The derivatives pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. One basis point equals $1,000 annually on a contract protecting $10 million of debt.
Private payrolls that exclude government agencies climbed 67,000 after a revised 107,000 increase in July that was more than initially estimated, Labor Department figures in Washington showed Sept. 3. The median estimate of economists surveyed by Bloomberg News called for a gain of 40,000.
China’s Ministry of Railways and Kreditanstalt fuer Wiederaufbau, Germany’s state-owned development bank, contributed $8.4 billion to bond offerings last week in the busiest week globally since the period ended Aug. 13. In Europe, Telefonica SA, Europe’s second-largest phone company, and German auto parts supplier Continental AG led 14.9 billion euros ($19 billion) of sales, the most in a month for the region, as companies took advantage of borrowing costs near the lowest in five years.
Leveraged loan prices rose for the first week since the period ended Aug. 6, as banks planned meetings to discuss financings for Tomkins Plc and Valeant Pharmaceuticals International. The Standard & Poor’s/LSTA US Leveraged Loan 100 Index increased 0.13 cent to 89.51 cents on the dollar, the highest since Aug. 23. The index tracks the 100 largest dollar- denominated first-lien leveraged loans.
In emerging markets, relative yields declined 8 basis points to 275 basis points, according to JPMorgan Chase & Co. index data. The spread is above last month’s low of 258 on Aug. 9.
Country Garden, Agile Property and Evergrande Real Estate Group Ltd. have cash surpluses that exceed their short-term debt, according to Feng Zhi Wei, a credit analyst at Standard Chartered Plc in Singapore.
Bond sales have “helped some developers build a substantial liquidity cushion” that would protect against a market downturn, she said in a phone interview. Evergrande’s 2015 notes are one of the bank’s “top picks in the Chinese high-yield developers universe,” she said.
Evergrande, which develops land in Guangdong province, said on Aug. 30 that net income rose to 2.5 billion yuan ($367 million) in the first half from 520 million yuan in the same period a year earlier. Pre-sales to Aug. 29 met 75 percent of its annual target and its free cash balance was 10 billion yuan.
The company’s 13 percent notes due 2015 last traded at 101.75 cents on the dollar, up from a low of 90 cents in May, BNP Paribas prices show.
Derivatives insuring against a default by Shimao Property Holdings Ltd. have fallen 327 basis points from a high this year of 918 basis points on May 7, according to data provider CMA. The credit-default swaps show investors are pricing in a 40 percent chance of default, down from 54 percent in May.
Swaps on Country Garden have tumbled 408 basis points from a high of 1,163 on the same day in May, when the Ministry of Housing and Urban-Rural Development said rapid home price gains could spread to more regions and Swire Properties Ltd. shelved a share offering.
Home prices in 70 Chinese cities rose 10.3 percent in July from a year earlier, the slowest pace in six months, after regulators in Beijing started their measures to cool the market.
Industrial output that rose the least in 11 months and new bank loans that trailed economists’ forecasts in July damped speculation for another round of tightening. Yasheng Huang, a professor at the Massachusetts Institute of Technology in Cambridge, said at an Aug. 17 talk in Beijing that real estate is “too important” to China’s economy for the government to choke the market too much.
“Credit investors are looking over this valley,” Donald Straszheim, International Strategy & Investment Group’s head of China research, said in a telephone interview from Los Angeles. “While there may be some disruptions in the short-term, they can see that the underlying demand for housing in China remains strong.”
Developers have sold $2.4 billion of notes since June 30, including $400 million of 10.5 percent bonds from Country Garden, $250 million of 12.5 percent debentures from KWG Property Holding Ltd. and $500 million of 9.65 percent securities from Shimao Property, according to Bloomberg data.
“The high-yield Chinese property bond space has doubled in size this year,” said Keith Chan, a credit analyst for HSBC Holdings Plc in Hong Kong. “There’s no imminent default risk.”
Developers’ cash reserves are sufficient enough to withstand a slowdown in housing inflation, said George Sun, Nomura’s head of credit sales for Asia ex-Japan.
“Property prices may have stabilized, but year-on-year they’re still 10 percent higher,” Sun said. “A second tier city in China has five to 10 million people, and while you hear anecdotes of places in Shanghai being overbuilt, there are a lot of other cities where there’s real demand for housing from the growing middle class.”
Coupons paid by developers which sold bonds since July 1 average 10.73 percent, compared with 11.1 percent for those issued in the first six months. Fantasia Holdings Group Ltd., a company with commercial and residential projects in the Pearl River and Yangtze River delta regions, paid the highest coupon at 14 percent while New World paid the lowest at 7 percent.
Banks in China extended 533 billion yuan of loans in July, compared with the median forecast of 600 billion yuan in a Bloomberg News survey of 23 economists. The nation set a full- year loan target of 7.5 trillion yuan to sustain growth and may “tolerate” banks breaching that, Societe Generale SA said Aug. 24. A record 9.59 trillion yuan was extended in 2009.
“Economic data show overheating concerns have cooled,” said Vince Chan, a Hong Kong-based credit strategist at brokerage Amias Berman. “If the economy keeps showing signs of growth moderation, we could see these property bonds which underperformed in the first half outperform in the second.”
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