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Property Bonds Plunge Most Since 2008 on Curbs: China Credit

Property Bonds Plunge Most Since 2008 on Curbs
A security guard stands outside East No. 1, Shimao Group residential development in Kunshan, China. China is reviewing loans to developers by trust companies, which have become a last resort for many borrowers after the central bank raised interest rates five times over the past year and curbed lending to property companies. Photographer: Qilai Shen/Bloomberg

China’s property company bonds are delivering the biggest losses in the world among developers this quarter amid speculation the banking regulator may close another avenue of funding.

Dollar-denominated debt of Evergrande Real Estate Group Ltd., Hopson Development Holdings Ltd. and other Chinese homebuilders rated below investment grade has plunged 19.9 percent since June 30, the biggest quarterly decline since the last three months of 2008, according to Bank of America Merrill Lynch data. Junk bonds sold by U.S. homebuilders, including Beazer Homes USA Inc., lost an average 7 percent, data show.

China is reviewing loans to developers by trust companies, which have become a last resort for many borrowers after the central bank raised interest rates five times over the past year and curbed lending to property companies. The stricter controls on the loans will add further financing pressure, according to a Sept. 23 report from UBS AG.

“Some of the small players may find it tough to survive,” Bei Fu, a Hong Kong-based analyst at Standard & Poor’s, said in a telephone interview yesterday. “In the next six to 12 months liquidity is the key risk for this sector.”

Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, S&P said in a report released today.

Deprived of bank loans by government policies, developers turned to private trust companies for financing, paying between 16 percent and 25 percent, according to an official at Beijing National Trust in May, who asked not to be identified because he wasn’t authorized to speak to the media. Property companies haven’t issued bonds in international markets since China Resources Land Ltd. raised $1 billion of 4.625 percent notes on May 12.

Few Choices

Trusts typically raise capital from wealthy individuals and companies and invest the proceeds. Real estate trust funds expanded by 150 percent from 235 billion yuan in March 2010 to 605 billion yuan as of June 2011, UBS said in its Sept. 23 research note. They made up around 50 percent of many developers’ total new loans over the past year, Credit Suisse AG analyst Jinsong Du said in a Sept. 23 report.

“There aren’t a lot of choices out there,” Thomas Gurnee, Xinyuan Real Estate Co.’s chief financial officer, said in a phone interview on Sept. 23. “The private equity guys were asking for 25 percent guaranteed returns for investing in projects so I don’t think anybody liked paying for that. So the trust loans were a nice middle ground, if you didn’t have a bank loan but you still wanted to get into a project.”

‘Too Expensive’

Beijing-based Xinyuan had one trust loan that it paid off earlier this year, he said. “We’re too small to access bonds, and it’s expensive. It’s got to be pretty big to make it worthwhile.”

Authorities have ordered more than 20 trust companies to stop financing real estate projects, Guangzhou Daily reported on July 28. Reuters reported Sept. 22 the banking regulator ordered trust companies to report their dealings with Chinese property developer Greentown China Holdings Ltd.

The extra yield investors demand to own $400 million of 2013 bonds sold by Greentown China Holdings Ltd., the largest builder in the eastern province of Zhejiang, instead of similar-maturity Treasuries, has increased by 1,070 basis points since June 30 to a record 2,317 basis points as of 11:02 a.m. in Hong Kong, according to Royal Bank of Scotland Group Plc prices.

Of Greentown’s 35 billion yuan of total debt, 5 billion yuan comes from trust loans, Chief Financial Officer Simon Fung said in a phone interview from the company’s headquarters in Hangzhou on Sept. 22. The developer didn’t obtain fresh funding from trusts this year as it was already very difficult to get such loans in 2010, he said.

Convertible Yuan

The yield on China’s 10-year government bond has risen 0.1 basis points this quarter to 3.89 percent. China’s yuan gained, snapping a three-day drop, on speculation policy makers will allow currency gains to tame inflation. The yuan strengthened 0.12 percent to 6.3932 per dollar as of 12:06 p.m. in Shanghai, according to the China Foreign Exchange Trade System.

China’s is the only currency among the biggest emerging nations to strengthen against the dollar this quarter. The yuan has climbed 1.1 percent versus the greenback since June 30, while India’s rupee dropped 9 percent, Russia’s ruble fell 14 percent and the Brazilian real slumped 15 percent.

The yuan may become a fully convertible currency in five years as China moves toward more market-determined interest rates and opens up to more investment from abroad, Li Daokui, a People’s Bank of China adviser, told a forum in Washington on Sept. 25.

D.R. Horton

The cost to protect China’s sovereign debt against default has surged 89 basis points this quarter to 173 basis points yesterday, the highest level since March 2009, according to data provide CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit default-swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Spreads on U.S. homebuilder D.R. Horton Inc’s $500 of 2016 bonds have risen 177 basis points this quarter to 570 basis points, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The yield premium on Hong Kong-listed Hopson Development’s $300 million of 11.75 percent notes due January 2016 widened 862 basis points this quarter to a record 2,094 basis points, according to RBS prices.

Regular Monitoring

Five-year default swaps insuring the debt of Hopson from non-payment have increased 576 basis points to 1,787 basis points since June 30, according CMA data. Hopson develops, manages and invests in properties in China.

Mui Chan, a Hong Kong-based investor relations and accounting officer at Hopson, said by phone yesterday the company had no comment on its bond prices.

Agile Property Holdings Ltd., Shimao Property Holdings Ltd., Country Garden Holdings Co., Guangzhou R&F Properties, China Central Real Estate Ltd., and Yuzhou Properties Co. have all borrowed from trust companies in 2011, Nomura Holdings Inc. analysts said in a Sept. 22 research note.

The inquiries by the China Banking Regulatory Commission are part of regular monitoring and aren’t targeting any individual company, a person familiar with the matter said on Sept. 23, declining to be identified because the regulator’s queries were meant to be private.

Chinese property companies access to bank loans has been effectively halted since November 2010, Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a Sept. 22 note.

‘Cut Prices’

“The increasing liquidity pressure will force developers to cut prices, in order to increase sales and bring in more sustainable cash flow,” Shen wrote. “This process should have been started by the developers some time ago, instead of resisting price cuts and turning to various costly financing channels.”

Hong Kong-based Shimao Property Holdings, the developer controlled by billionaire Xu Rongmao, has almost 53 percent of 37 billion yuan of bank debt maturing over the next two years, CreditSights Inc. said in a Sept. 5 report. The company sold a $350 million bond in March, and borrowed 22 billion yuan from Bank of China Ltd, according to the report.

The spread over government bonds on the company’s 11 percent notes due in March 2018 has widened 603 basis points this quarter to 1,497 basis points, according to RBS.

Mortgage Difficulties

The banking regulator’s investigation into trust loans to property companies will have no impact on the company’s cash flow, Tammy Tam, a Hong Kong-based spokeswoman at Shimao, said by e-mail.

It’s becoming more difficult for buyers in China to get mortgages, Xinyuan’s Gurnee said, as banks have put in place quotas.

“Getting mortgages used to be as easy as rolling out of bed,” he said. “People are having a harder time.”

China’s measures to control its property market are at a critical stage and the nation needs to focus efforts on curbing price increases in less affluent cities after limiting home purchases in metropolitan areas including Beijing and Shanghai, Premier Wen Jiabao said on Sept. 1. Only two cities responded to the government’s July call for added restrictions on housing purchases.

“If the regulators want to unwind all these trust transactions, then these developers might need to repay all these trust loans,” Annisa Lee, a Hong Kong-based credit analyst at Nomura Holdings Inc., said in a phone interview on Sept. 23.

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