Chinese Developer Bonds Sink in Secondary Trade Amid Collapse

Some 66 percent of new Chinese developer dollar-denominated bonds sold this year are trading below their issue price amid the collapse of a private real estate company and news the housing market is cooling.

About $6.3 billion of notes in the U.S. currency sold by property companies including Guangzhou R&F Properties Co., KWG Property Holding Ltd. and Shimao Property Holdings Ltd. have fallen in secondary market trade, according to data compiled by Bloomberg. Prices on Kaisa Group Holdings Ltd.’s 2018 8.875 percent debentures dropped to a seven-month low yesterday while Shimao Property’s $600 million of 8.125 percent notes due 2021 and sold to investors at par in January were trading at 97.646 cents on the dollar.

Demand for developer debt is waning after government officials familiar with the matter said yesterday Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay 3.5 billion yuan ($566 million) of debt. The value of home sales in the world’s second-biggest economy fell 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.

“We’re cautious on property bonds short term, with the developers expected to report weaker year-on-year monthly sales data for March,” said Owen Gallimore, a Singapore-based credit analyst at Australia & New Zealand Banking Group Ltd. “For the majority of high yield property developers, January and February sales fell as tier three and four cities suffered from over supply and the smaller developers faced a credit squeeze.”

First Default

China Resources Land Ltd. was the last company from China and Hong Kong to sell dollar debentures in Asia, adding $50 million to its existing 4.375 percent bonds due February 2019 on March 13.

The collapse in secondary prices 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.

Zhejiang Xingrun Real Estate, based in the eastern town of Fenghua in Zhejiang Province, lacks 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.

Prices Cool

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 cost of insuring corporate and sovereign bonds against non-payment fell across the Asia-Pacific region today as data showing improved U.S. factory output helped spur demand for riskier assets.

Credit Risk

The Markit iTraxx Asia index dropped 2 basis points to 128 basis points as of 8:12 a.m. in Singapore, ANZ prices show. The measure is poised for its first back-to-back daily decline since March 7, according to data provider CMA.

The Markit iTraxx Japan index declined 2 basis points to 77.5 as of 9:11 a.m. in Tokyo, Citigroup Inc. prices show. The measure has fallen since ending last week at 81.5 basis points, the highest level in a month, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Australia gauge decreased 1 basis point to 104 as of 11:11 a.m. in Sydney, according to National Australia Bank Ltd. The benchmark closed last week at a one-month high, CMA data show.

Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

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