Developers’ Bonds Decline Amid China Housing BankruptcyYe Xie and David Yong
Stocks and bonds issued by some Chinese real estate companies extended a slump after the collapse of a developer stoked concern defaults are starting to mount as the economy slows and the government reins in lending.
The 8.75 percent notes due 2018 sold by Evergrande Real Estate Group Ltd., the nation’s fourth-largest developer by market value, fell 1 cent on the dollar today, sending the yield to 10.562 percent, the highest on record, DBS Bank Ltd. prices show. The yield on Agile Propery Holdings Ltd.’s February 2017 notes jumped 20 basis points to 7.459 percent, the highest since they were sold last month, according to Australia & New Zealand Banking Group Ltd. prices.
Government officials familiar with the matter said yesterday that closely-held Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The housing market in the world’s second-biggest economy is cooling with the value of home sales falling 5 percent in the first two months of the year after local governments stepped up measures to curb rising prices. The 7.5 percent economic expansion targeted by China this year would be the slowest since 1990.
“Chinese developers are extremely exposed to the easy credit that’s used to finance purchases and investment,” said Patrick Chovanec, the New York-based chief strategist at Silvercrest Asset Management Group LLC, which oversees $14.1 billion in assets. “When credit is reined in even slightly, it undercuts demand. This is potentially an inflection point.”
The collapse comes less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. became the first company in China to default on its onshore corporate bonds. Multiple calls to the chairman’s office and financial department at Zhejiang Xingrun weren’t answered today.
China will face more credit risks in its $4.2 trillion onshore bond market following Chaori Solar, according to China International Capital Corp. The investment bank flagged 12 companies with outstanding onshore bonds in “great need” of more scrutiny after changes in the debt profiles of the issuers, it said in a March 14 report.
“Looking at the second quarter, we think the worst of credit risk is far from over,” CICC bond analysts Ji Jiangfan, Zhang Li, Xu Yan and Wang Zhifei said. “Lower-rated bonds’ credit premiums may stay at high levels or rise to new highs.”
Speculative-grade Chinese debt lost 1.1 percent in the four days through yesterday, the worst slide since Jan. 28, according to an index compiled by Bank of America Merrill Lynch. Sixty-nine of 106 securities in the measure are from real estate developers.
The Shanghai Property Index fell 0.9 percent, as half of its 24 members declined. The gauge has dropped 10.2 percent this year and touched a 17-month low on March 10.
The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. climbed for the first time in seven days yesterday, rising 0.8 percent to 97.16. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., added 0.1 percent to $33.07.
The yield on Evergrade’s $1.35 billion of 13 percent bonds due January 2015 rose 29 basis points, or 0.29 percentage point, to 8.908 percent today, the highest since July, BNP Paribas SA prices show. The notes are rated at BB- by Standard & Poor’s, or three levels below investment grade. Shenzhen-based Kaisa Group Holdings Ltd.’s 8.875 percent notes due 2018 dropped to a seven-month low yesterday, sending the yield past 10 percent for the first time since August.
Zhejiang Xingrun, based in the eastern town of Fenghua in Zhejiang Province, doesn’t have cash to repay creditors that include more than 15 banks, according to the officials, who asked not to be named because they weren’t authorized to discuss the matter. The company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said.
The company is the largest property developer at risk of bankruptcy in recent years and more companies may run into trouble as sales decline and funding becomes limited, according to Nomura Holdings Inc.
“This is a far more serious situation than Chaori Solar’s default, as it hits right at the heart of China’s property boom,” Mark Bayley, a credit strategist at Aquasia Pty in Sydney, said in a report today. “The real danger now is that banks will considerably tighten liquidity afforded to the real estate and property development sectors.”
At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.
New-home price growth slowed last month led by Beijing, Shenzhen, Shanghai and Guangzhou, the four cities the government defines as first tier, the National Bureau of Statistics said today. Prices in Beijing and Shenzhen each rose 0.2 percent in February from a month earlier while they added 0.4 percent in Shanghai, the smallest increase since November 2012, and gained 0.5 percent in Guangzhou. Prices advanced in 57 of the 70 cities the government tracks, versus 62 in January.
The collapse of Zhejiang Xingrun Real Estate doesn’t necessarily herald the start of defaults in rated dollar bonds sold by other Chinese developers, according to Charles Macgregor, Lucror Analytics Pte.’s Singapore-based head of Asia.
“We don’t believe investors holding U.S. dollar-denominated property bonds should be concerned, given generally sound issuer fundamentals and low probability of default,” Macgregor said.
Some 66 percent of new Chinese developer dollar bonds sold this year are trading below their issue price, according to data compiled by Bloomberg.
Chinese property shares slid to a 16-month low in February after Industrial Bank Co. suspended mezzanine financing for developers, adding to concern that smaller developers may default on their borrowings amid the government’s property curbs and an economic slowdown.
American depositary receipts of SouFun Holdings Ltd., China’s biggest real-estate information website, slipped 0.4 percent to $82.80 yesteday, extending a seven-day decline to 15 percent. E-House China Holdings Ltd., based in Shanghai, sank 2.6 percent to $14.08.