Nomura Sees U.S. Investors `Inevitably' Investing in China Property Bonds
U.S. investors in speculative-grade corporate debt will “inevitably” have to buy China developers’ bonds if they aim to beat benchmarks such as Barclays Plc’s high-yield indexes, according to Nomura Holdings Inc.
Money managers have avoided China property bonds on concern over the notes’ structure and the outlook for recoveries in the event of defaults, Nomura analysts led by Pradeep Mohinani said in a note to clients today after investor talks in the U.S.
“If the demand for yield remains insatiable for a sustainable period, the U.S. investor base will inevitably have to go long the Chinese high-yield property segment,” Hong Kong- based Mohinani said. “There is likely to be capitulation once the yield crosses a certain point.”
BNP Paribas SA raised its view on the China property sector to “positive” from “neutral” today, saying the government will probably hold back from further measures to curb appreciation. The percentage of urban households that expect house prices to keep rising increased 7.2 percentage points from the second quarter to 36.6 percent, China’s central bank said in a report.
Barclays’ Global High-Yield Index returned 6.6 percent in the past three months while its U.S. Corporate High-Yield Index returned 4.9 percent. High yield ranks below Baa3 at Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
Country Garden Holding Co., which builds condominiums in China, has $550 million of 11.25 percent bonds due 2017 that it sold at 99.408 cents on the dollar in April. The notes traded as high as 106 cents to yield 9.982 percent on Sept. 14, ING Groep NV prices show, and they may rise further, according to Mohinani.
Kaisa Group Holdings Ltd.’s $350 million of 13.5 percent bonds due 2015 were sold at par in the same month and last traded at 101 cents to yield 13.193 percent, ING prices show. Kaisa develops property in China’s Pearl River Delta.
“We reminded investors that Chinese high-yield property names have benefited tremendously from onshore bank liquidity and strong bids from private banking accounts in Asia,” Mohinani said after meetings in New York, Boston and San Francisco this month. “Through the global financial crisis there were no defaults to emerge from the sector.”