BlackRock Buys Riskier Developers as Yields Slump: China Credit

BlackRock Inc., the world’s largest asset manager, is buying more debt from lower-rated Chinese property developers as a pick-up in the economy cuts junk-bond yields to the lowest in almost eight years.

Speculative-grade notes sold by the nation’s companies pay an average 7.63 percent, down 713 basis points over the past year and the lowest since March 2005, according to Bank of America Merrill Lynch indexes. The country’s B rated issuers offer 247 basis points more than their BB peers, the data show. That exceeds the 147 basis-point spread between similar U.S. junk bonds, according to the indexes.

“The operating environment for property companies and their ability to fund themselves has improved,” said Joel Kim, head of Asia-Pacific fixed income in Singapore at BlackRock, which managed $3.67 trillion as of Sept. 30. “We’re venturing out a little bit more into single B rated companies within that sector where we believe the fundamentals are good enough.”

Rising demand from global funds, encouraged by a seven-month increase in new home prices in the world’s second-largest economy, has helped developers in mainland China and Hong Kong sell the most dollar bonds on record, according to data compiled by Bloomberg. Unrated CSI Properties Ltd. and Hopson Development Holdings Ltd., graded B- by Standard & Poor’s, both sold notes this week.

Growing Appetite

More than $1 billion of cash flowed into emerging-market bond funds in the week to Jan. 2, according to data provider EPFR Global. Chinese and Hong Kong developers sold $2.8 billion of bonds this week, making this month already the busiest-ever for these borrowers, with $4.05 billion of sales. Country Garden Holdings Co., the developer owned by Yang Huiyan, China’s richest woman, and Kaisa Group Holdings Ltd. opened the dollar market for Asian issuers in the new year.

Kaisa, which S&P rates four grades below investment at B+, received almost $10 billion in orders for its $500 million sale, a person familiar with the matter said.

Hopson’s notes were rated CCC+ by S&P, one notch below its corporate rating due to concern that offshore noteholders would be materially disadvantaged in the event of a default. The $300 million bond attracted $6 billion of demand from investors, another person familiar with the matter said.

Market Expansion

“The reception is definitely an encouragement, especially for smaller issuers,” Jacphanie Cheung, a director of corporate credit research in Hong Kong at Deutsche Bank AG, said in a phone interview on Jan. 9. “Investor interest in Chinese property bonds remains strong because they offer relatively better yields than other sectors.”

Offerings from Chinese developers this year may exceed the record $10.2 billion of issuance in 2012, assuming debt maturing in 2013 and 2014 is refinanced this year, she said.

Private banks and retail investors are becoming an important group of buyers for Asian junk bonds, according to JPMorgan Chase & Co. Their allocations for high-yield primary issues doubled to 30 percent between 2010 and 2012, Hong Kong-based credit analysts at the lender including Soo Chong Lim wrote in a Nov. 28 report.

‘Early Stages’

Reallocation of funds from the U.S. and Europe into the Asian credit market is “in the early stages,” according to a commentary last week on the website of Pacific Investment Management Co., which manages the world’s biggest bond fund. Chinese corporate dollar debt performed better than notes sold by the companies of any other Asian country in 2012, according to Bloomberg-compiled data.

Economic growth in China may rebound to 8.1 percent in 2013 from an estimated 7.7 percent in 2012, according to economists surveyed by Bloomberg. Exports last month rose the most since May, the customs bureau said yesterday. Manufacturing expanded at the fastest pace in 19 months, according to a statement from HSBC Holdings Plc and Markit Economics on Dec. 31.

New home prices climbed 0.23 percent last month from November, a seventh-straight increase, and expectations for further advances boosted sales, according to SouFun Holdings Ltd. The Ministry of Housing and Urban-Rural Development said last month it would support demand for bigger homes, prompting speculation that authorities won’t add to curbs including higher down payments.

China’s benchmark 10-year government bond yielded 3.6 percent as of yesterday, climbing from as low as 3.24 percent on July 11, as the economy recovers. Top-rated corporate debt with similar maturities pays 5.28 percent, according to Chinabond indexes. The yuan strengthened 0.13 percent to 6.2163 per dollar as of 10:20 a.m. in Shanghai and touched 6.2155, the highest level since the government unified official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System.

Remarkable Reception

The cost of insuring China’s debt against non-payment with credit-default swaps has fallen 3.4 basis points this year to 62.9 basis points as of yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Investors offered to buy more than 24 times the amount of notes that Country Garden sold last week, a person familiar with the matter said. The yield on the 7.5 percent bonds due 2023 fell to 7.06 percent as of 9:18 a.m. today, according to prices quoted by Credit Agricole SA.

Agile Property Holdings Ltd., whose billionaire chairman was charged with indecent assault this week, is marketing perpetual dollar notes, a person familiar with the matter said today. Lai Sun Development Co. sold five-year securities, a person with knowledge of the matter said, while Champion Real Estate Investment Trust, whose investments include the Citibank Plaza building and Langham Place in Hong Kong, priced 10-year securities, data compiled by Bloomberg show.

“Investors are putting new money to work and new issues are the best way to stay invested,” said Raymond Chia, deputy head of credit research for Asia fixed income in Singapore at Schroder Investment Management, which oversees $7 billion of fixed-income assets in Asia. “The reception to these new bond issues has been remarkable.”

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