BlackRock Sees Developer Value Following Declines: China Credit

BlackRock Inc. says Chinese developer bonds will rally from the worst start in three years, even after the central bank said it would enhance monitoring of credit risks in the industry.

Dollar notes sold by Chinese builders including Agile Property Holdings Ltd. and Country Garden Holdings Co. lost 0.4 percent this year, the worst performance since the beginning of 2011, according to Bank of America Merrill Lynch indexes. The decline, which comes after a 6.3 percent advance in 2013, compares with a 0.5 percent gain for all dollar securities from the nation’s issuers and a 1.8 percent increase globally.

China’s central bank cited real estate among industries with debt at risk of default last weekend, echoing a Standard & Poor’s warning about developers including Glorious Property Holdings Ltd., whose leading executives quit last week after the stock slumped more than 70 percent since its 2009 debut. BlackRock continues to favor investing in property bonds after new home sales topped $1 trillion for the first time last year as Premier Li Keqiang called urbanization a “huge engine” for the world’s second-largest economy.

“While we expect defaults in China this year particularly from the shadow-banking segment, we do not expect a significant impact on the Chinese property issuers we cover,” said Suanjin Tan, a Singapore-based Asia fixed-income portfolio manager at BlackRock, which oversees $4.3 trillion in assets. “On the high-yield front, we adopt a more idiosyncratic approach to the sector, focusing on names we believe are well positioned to serve China’s growing housing demand.”

Policy Support

Policy changes such as the easing of the one-child per family policy and of rules requiring registration of urban residents will benefit the property industry, according to ING Investment Manager. The company, which oversees $230 billion of assets, sees the recent sell-off as a buying opportunity.

“The loss was a result of concerns around China’s financial system which has led to weak investor sentiment toward Chinese credits,” Clement Chong, Singapore-based credit analyst at ING Investment, said in an e-mail interview on Feb. 7. “We are still positive on the sector given supportive long-term fundamentals.”

The fall in bond prices hasn’t kept developers from China and Hong Kong from selling $7.1 billion of notes, in the second busiest start of a year ever, Bloomberg compiled data show. That follows record issuance of $9.2 billion in the same period last year.

Guangzhou R&F

Guangzhou R&F Properties Co. led issuance as new home prices in Guangzhou surged along with jumps in Beijing, Shanghai and Shenzhen. The developer, co-founded by billionaires Li Sze Lim and Zhang Li, sold $1 billion of 8.5 percent securities on Jan. 6. The notes, which were issued at par, traded at 99.9 cents on the dollar yesterday after dropping as low as 98.1 cents on Jan. 24, Bloomberg prices show.

Sales of new residences in China exceeded $1 trillion for the first time in 2013, the National Bureau of Statistics said last month. Premier Li has refrained from implementing any new nationwide property curbs since taking over from his predecessor Wen Jiabao.

Wanda Properties

There are signs that investor fatigue is forcing developers to pay more to borrow. Wanda Properties International Co., part of Dalian Wanda Group owned by Chinese billionaire Wang Jianlin, issued a 10-year note at 455 basis points more than Treasuries on Jan. 23, exceeding the 375 basis points on similar-rated notes issued the previous day by Dah Sing Bank Ltd.

“A single deal can sharply reprice the whole sector,” said Luc Froehlich, a Hong Kong-based fixed-income portfolio manager at Manulife Asset Management, which oversees $258 billion in assets globally.

The premium on 2017 securities sold by Agile, whose first property project was in the southern city of Zhongshan in 1992, leapt 31 basis points after the Wanda issuance to a five month-high of 677 basis points on Jan. 27.

Yields on the March 2018 securities of Glorious Property have surged to a record 20 percent. Its chief executive officer and chief financial officer resigned earlier this month, just weeks after shareholders rejected an offer by Chinese billionaire Zhang Zhirong to take the developer private.

Pioneer Investments, which oversees $236 billion of assets, is underweight property debt, Yerlan Syzdykov, Dublin-based head of emerging-market bonds at the money manager, said in an e-mail interview on Feb. 7.

“Government officials are committed to averting a property bubble with any means,” Syzdykov said. “We may go through a lot of volatility in the near term as PBOC keeps policy pretty tight to cool off speculation.”

Failed Trusts

China’s central bank signaled on Feb. 8 that interest rates will remain high as authorities squeeze out risky lending. The country’s seven-day repurchase rate has averaged 5.23 percent this month, up from 4.70 percent in January. The yuan declined 0.02 percent to close at 6.0636 per dollar in Shanghai yesterday.

Slowing economic growth is adding to scrutiny of debt in China as payment difficulties emerge in the $6 trillion shadow-banking industry involving off-balance-sheet trusts and wealth-management products. Expansion of the nation’s economy will likely slow to 7.4 percent this year, down from as high as 10.4 percent in 2010, according to the median estimate of economists surveyed by Bloomberg.

An investment product created by Jilin Province Trust Co. and backed by a loan to coal company Shanxi Liansheng Energy failed to repay investors when some tranches matured, Shanghai Securities News reported on Feb. 12, without citing anyone.

“Given their access to offshore financing sources, most of these issuers we look at have a more diversified funding structure compared to onshore property companies that have not been able to access the international capital markets,” said BlackRock’s Tan.

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