Yuan-Linked Bonds Reduce Powerlong Costs by 14%: China Credit

Powerlong Real Estate Holdings Ltd. (1238) saved 14 percent selling yuan-linked bonds as investors seek to profit from gains in China’s currency even as the government clamps down on the property sector.

The company sold 750 million yuan ($114 million) of three- year bonds settled in U.S. dollars to yield 11.75 percent, according to data compiled by Bloomberg. That’s about 4.75 percentage points higher than the average yield paid by U.S. companies rated below investment-grade, according to Bank of America Corp. indexes. It’s still less than the 13.98 percent yield on Shanghai-based Powerlong’s dollar bonds due September 2015, Royal Bank of Scotland Group Plc prices show.

Moody’s Investors Service cut its outlook on the company last month, warning that “higher-than-expected” land purchases would increase debt. Premier Wen Jiabao pledged to press ahead with controls on the property market to curb speculation, after China raised interest rises three times in four months and increased minimum down payments for second-home purchases.

These issuers have “done their math,” said Vijay Chander, Hong Kong-based head of credit strategy at Standard Chartered Plc. Using the synthetic structure Powerlong has attracted investors expecting currency appreciation that “does seem like a reasonable bet because there is pressure on the Chinese authorities to appreciate the yuan.”

Yuan Appreciation

So-called synthetic bonds, such as those Powerlong sold, allow international investors to profit from appreciation in the currency of the world’s fastest growing major economy.

China’s yuan may rise the most this year among the currencies of the so-called BRIC group of emerging economies, with a median forecast for a 4.2 percent gain against the dollar according to the median estimate of 24 strategists and economists surveyed by Bloomberg. That compares with a 2.9 percent advance for India’s rupee, and declines for Russia’s ruble and Brazil’s real, separate polls show.

The yuan touched 6.5628 per dollar on March 7, its strongest level since China unified official and market exchange rates at the end of 1993. The currency slipped 0.03 percent to 6.5740 as of 12:49 p.m. in Shanghai, according to the China Foreign Exchange Trade System, after strengthening by as much as 0.04 percent amid interest-rate increases in Thailand and South Korea that fanned speculation China will also boost borrowing costs in its fight to tame inflation.

‘Reasonable Level’

While the 11.75 percent yield on Powerlong’s notes are about 2.23 percentage points lower than its similar-maturity dollar-denominated bonds, it’s still the highest paid in the yuan synthetic market. The rate exceeds the previous record of 10.5 percent that China SCE Property Holdings Ltd. (1966) paid for its January 2016 bonds.

The bonds were “priced at a reasonable level,” Lawrence Leung, an investor relations director at Powerlong, said in a telephone interview from Hong Kong yesterday. Proceeds will be used to buy land, he said.

Powerlong’s stock plunged almost 10 percent in the six days after Moody’s gave the company’s debt a “negative” outlook on Feb. 18. Moody’s, which ranks Powerlong’s senior unsecured debt at B1, or four levels below investment-grade, cited “higher- than-expected” debt-funded land acquisition for its concern. Standard & Poor’s grades Powerlong’s debt an equivalent B+.

Land purchases of about 4 billion yuan in 2010 will pressure Powerlong’s liquidity, Kai Hu, a Moody’s analyst, wrote in the Feb. 18 report. Moody’s took into account greater risks stemming from Powerlong’s expansion into new markets where it will meet stiffer competition and tightened property purchase restrictions imposed by the government, according to Hu.

‘Caught Out’

Powerlong fell 10 percent in Hong Kong trading last month, its biggest monthly loss since it plunged almost 17 percent in January 2010. The shares declined 1.65 percent to HK$2.39 (31 U.S. cents) as of 12:59 p.m. in Hong Kong, according to data compiled by Bloomberg.

Chinese property developers “may be tempted to use funds to bolster their liquidity” and “war chests to make acquisitions while conditions are favorable,” Bei Fu, a credit analyst at S&P, said last month in a podcast. “Several issuers could be caught out if the current resilient market conditions turn quickly, and that could lead to downgrades.”

While companies have sold convertible yuan synthetic securities before, billionaire Vincent Lo’s Shanghai-based Shui On Land Ltd. (272) was the first to issue them without equity features when it raised 3 billion yuan from 6.875 percent, three-year notes in December. Most borrowers have been Chinese property companies, according to Bloomberg data.

Shui On, Evergrande

Evergrande Real Estate Group Ltd. (3333), China’s biggest developer by sales, raised 9.25 billion yuan by selling three- year synthetic bonds priced to yield 7.5 percent and five-year notes yielding 9.25 percent in January, Bloomberg data show. The company’s dollar-denominated January 2015 bonds yielded almost 10.5 percent at the time the yuan notes were issued, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Speculative-grade corporate debt yields in the U.S. have averaged 7.04 percent this year, according to Bank of America Merrill Lynch’s U.S. High Yield Master II Index, which tracks the performance of more than 2,000 dollar-denominated securities. Speculative-grade, or junk, bonds are rated below BBB- by S&P and less than Baa3 at Moody’s.

Five-year credit default swaps on Chinese government debt are 4 1/2 basis points higher this year on concern anti- inflation measures will threaten economic growth. The central bank raised reserve requirements for lenders on Feb. 18 just 10 days after boosting rates. The contracts fell one basis point to 72 basis points yesterday, CMA prices in New York show. A basis point is 0.01 percentage point.

Sovereign Risk

Credit-default swaps insure debt against default, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The yield on China’s 2.68 percent government bond due in November 2013 fell seven basis points to 3.24 percent yesterday, Chinabond prices show. One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, rose two basis points to 3.44 percent as of 1.08 p.m. in Shanghai, according to data compiled by Bloomberg.

Money that’s raised in international capital markets faces restrictions when brought back into China. Transferring funds requires approvals from the nation’s State Administration of Foreign Exchange, or SAFE, and is vetted on a case-by-case basis.

Premier Wen Jiabao pledged on March 5 to check excessive gains in housing prices, as prices gained for a 19th month in December. The government extended curbs in January, including raising the minimum down payment for second-home purchases, telling local governments to set price targets on new properties, and introducing taxes for homes in Shanghai and Chongqing.

“For the synthetic markets, most of that yield is credit risk,” said Bryan Collins, a portfolio manager at Fidelity International Ltd., which manages $231.6 billion of assets globally. “You really need to be looking at the underlying companies very closely.”

To contact the reporter on this story: Shelley Smith in Hong Kong at ssmith118@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

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