Kaisa Creditor Fuchs Says Single-B China Property Debt Cheap

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Benjamin Fuchs is unfazed by being caught in the first dollar bond default of a Chinese developer.

The chief investment officer of BFAM Partners (Hong Kong), a hedge-fund firm overseeing $1.2 billion of assets, said offshore debt of Chinese property developers with a single-B credit rating was “extremely cheap” and the default risk exaggerated.

“That’s precisely where you should be investing,” he said Wednesday at the Sohn Conference Hong Kong presented by the Karen Leung Foundation, a gathering where top Asia-focused hedge-fund managers share ideas and raise money to combat gynecological cancers.

BFAM is among eight remaining money managers sitting on the offshore bondholder committee of Kaisa Group Holdings Ltd. The Shenzhen-based company became the first Chinese developer to default on U.S.-dollar debt in April, sending shock waves across the high-yield bond market.

BFAM, which traces its roots to proprietary trading desks at Lehman Brothers Holdings Inc. and Nomura Holdings Inc., holds single-B rated offshore debt of various publicly listed Chinese developers, which Fuchs describes as “the weakest among the strongest,” with high yields and low default rates.

Break Even

Such bonds are trading at an average yield of about 10 percent, attractive even accounting for the risk, he said. Even if a cumulative 30 percent of companies held by investors default on their bonds and no money is recovered, owners of a diversified basket of single-B Chinese developer debt will be able to break even.

Defaults on that scale are unlikely as that figure is four times the losses during the global financial crisis, when the three-year cumulative single-B debt default rate reached 17 percent with a 45 percent recovery rate, he added, citing rating-company data.

“The high-yield market is implicitly pricing in this huge Chinese financial crisis,” he said, adding that fear that international investors won’t get paid for holding offshore subordinated debt “doesn’t match the reality.”

Asian corporate dollar high-yield bonds returned 1 percent this year, according to the Bank of America Merrill Lynch index. Their average yields have come down to 7.76 percent from the 10 percent peak in mid-January, which was triggered by the Kaisa concerns.

No Crisis

Company owners typically have their net worth tied up in offshore listed companies used to issue debt, which they would lose in the case of a default, Fuchs said. That gives them a way to obtain hard-to-get funding to buy land in China. They are also one of the few legal ways for them to move cash offshore, he added.

“There are some super strong financial incentives to repay and maintain that whole offshore structure despite the fact legally, we all know it’s relative weak,” Fuchs said.

Developers are set to benefit from Chinese central bank monetary easing and the release of pent-up demand after the recent relaxation of property-purchase restrictions, he said.

“We don’t think the financial crisis is around the corner; we don’t think the property market is about to collapse,” he said. “Spreads are going to get much tighter.”