Kaisa Bonds are ‘Extremely Cheap,’ Hedge Fund BFAM’s Fuchs Saysby
Bonds trading at spread 1,100 bps wider than comparables
Kaisa is poster child for things that scare foreign investors
Bonds of Kaisa Group Holdings Ltd., the first Chinese property developer to default on dollar-denominated debt, are "extremely cheap," said Benjamin Fuchs, founder of the $1.8 billion hedge fund firm BFAM Partners.
“Kaisa is really the poster child for everything that scares Western investors,” Fuchs said on Wednesday at the Sohn Conference Hong Kong 2016 presented by the Karen Leung Foundation, pointing to issues including regulatory and accounting problems.
The spread of Kaisa’s offshore debt, or the extra yield investors are demanding for holding it over risk-free zero-coupon debt, may tighten by 600 to 700 basis points over the coming year, Fuchs said. One hundred basis points equal 1 percentage point.
Fuchs’s contrarian bets including those on beaten-up junk bonds of Chinese developers have helped his fund advance at a time when global peers have stumbled. The manager, who said in a May interview that he started buying Kaisa bonds in January 2015, said at the Sohn conference last year that the single-B offshore debt of Chinese developers was “extremely cheap.”
BFAM’s Kaisa recommendation comes as defaults among companies in Greater China have mounted amid the slowest economic growth in a quarter century. S&P Global Ratings predicted record downgrades for Chinese developers in May, after taking 15 negative actions on such companies through May 6. Moody’s Investors Service in early March cut China’s credit-rating outlook to negative from stable, highlighting the country’s surging debt burden.
Spreads on Kaisa bonds were about 1,100 basis points wider than comparable single-B rated Chinese property debt, a level usually reserved for distressed companies, said Hong Kong-based Fuchs, a former Lehman Brothers Holdings Inc. trader. Kaisa’s 2018 notes plunged as low as 26 cents on the dollar in January 2015. They have since rebounded to 77 cents on the dollar.
Fuchs said the business is “rapidly normalizing,” and that even without any valuation changes, the bonds will offer a yield of about 19 percent to 20 percent.
Kaisa, based in Shenzhen, went into default on dollar bonds after missing payments in April 2015. It was probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen taken into custody in a graft investigation, according people familiar with the matter. The company was blocked from selling projects by local authorities and courts in Shenzhen and other Chinese cities. In March, it announced net losses for the first three quarters last year and for 2014. Most of the blockages and freezing orders from courts have been lifted, the company said in March.
BFAM was part of a dissenting group of Kaisa offshore creditors that pushed for better restructuring terms for debt holders. The restructuring plan, which was approved by holders of 96 percent of its offshore obligations in May, called for replacing its existing debt with new bonds which will have lower cash coupons in early years.
Instead, investors will get more debt securities as interest payments. Kaisa’s new bonds will average 4.8 years in maturities, more than the average three-year duration of similar Chinese property debt, another less-desirable feature. Fuchs said the bond’s spread more than compensates for these features.
At the June 2015 Sohn conference, Fuchs said prices of single-B Chinese developer bonds at that time implied losses four times the level seen during the 2008 global financial crisis. The top-performing emerging Asia junk bond funds all benefited from larger Chinese property bond holdings than benchmark indexes last year, as the debt rallied.
BFAM’s Asian Opportunities Master Fund returned 5.9 percent this year through April, adding to last year’s 11 percent gain and bringing the annualized return since its 2012 inception to 16.7 percent.