Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

In days of negative rates, it's hard to get excited about anything, even high-yield bonds from China. A small dollar debenture offering by a property developer , however, has generated some heated chatter in Hong Kong and Singapore. 

Zhengzhou-based Central China Real Estate Ltd. told investors on Monday that it was planning to sell about $200 million of dollar securities at an indicated 6 percent. Usually in Asian markets, after a deal is announced with a price level it gets completed at the close of business in New York at the latest. Instead, portfolio managers in Asia woke on Tuesday morning to an announcement that the deal was still outstanding but was now offered at an indicative yield of 6.75 percent, the level at which it was eventually sold. 

Untrained eyes saw nothing extraordinary. Old hands in the Asian bond market, however, balked in disbelief -- one banker even asked if there were typos in the announcements.

There are unwritten rules about what happens when things go awry. Usually, if banks suggest a yield that investors aren't happy with, they either postpone the deal or make a revision upward of, say, 25 basis points. Even that is rare because by the time a bank issues guidance it has often sounded out portfolio managers for a sense of how much they're willing to accept. 

In Asia, the rule of thumb is that revisions are usually for 20 basis points less than what was first announced. The exceptions are when unexpected events happen just as a deal is being executed, and those cases, again, often culminate in postponements.

The change in trajectory suggests two things, neither of which is good news for Chinese developers. The first is that banks are less willing to rescue high-yield issuers if they can't refinance bonds. In this case, according to S&P Global Ratings, the new securities were being sold to pay back S$200 million ($143.8 million) of Singapore notes due in May.

Singapore state-investment fund Temasek is one of Central China Real Estate's biggest shareholders, and DBS Group Holdings Ltd. has been a bookrunner in its local currency notes, so it would have been natural to conclude that DBS might step up if the developer was having trouble replacing the notes with new bonds. The fact that banks continued with the debt offering at a higher price suggests otherwise. 

Maxed Out
China Central Real Estate's debt-to-equity ratio, a measure that is widely observed by lenders, hit a record at the end of June
Source: Bloomberg

This also shows that bond investors have become less complacent and will only accept risk that is appropriately rewarded. With new rules making it more difficult for developers to sell debt in mainland China, more of their funding needs are expected to be met by foreign investors. Well, that won't be so straightforward, if CCRE is any gauge.

Yield Inflation
The average yield of Asian dollar-denominated junk debt has started to rise
Source: Bloomberg

Developers have already accounted for 63 bankruptcies this year, the biggest contributor to 507 restructurings in China. If refinancing through loans becomes more difficult and bonds become more expensive, the danger of even more bankruptcies increases. It may be a small deal, but Central China Real Estate's securities say a lot about the future of high-yield bonds in Asia. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates second paragraph with the completion of the debenture sale.)

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net