Chinese Property Bonds Are Hot, Defaults Aside

Investors find more appetite for risk as they hunt for yields in a challenging market

By Xie Yu

China’s property bond sales are up, despite market challenges. Pictured: Guangzhou, in the southern province of Guangdong. / PHOTO: NOEL CELIS/AGENCE FRANCE-PRESSE/GETTY IMAGES

Yield-hungry investors are still snapping up Chinese property bonds, despite a recent string of defaults, tighter regulation and market unease about one of the country’s biggest developers.

As of June 2, real-estate companies from China had sold $20.3 billion of dollar bonds this year, according to Refinitiv, a 16% increase over the same period last year.

Heavy bond issuance from Chinese developers is “completely contrary” to market expectations for a decline in deals, said Owen Gallimore, head of credit-trading strategy at ANZ. 

He said alongside debt sales by Chinese tech firms, this was offsetting subdued supply from state-backed companies. 

“When deals come, the investor demand is enormous,” Mr. Gallimore said.

Last week, Times China Holdings Ltd. got more than $4.8 billion of orders for a $400 million, three-year junk-bond deal yielding 5.55%, according to a notice from one of the underwriting banks. 

The bonds from Times China, which is based in the Southeastern province of Guangdong, were rated 3-4 notches below investment-grade.

The robust bond sales are surprising because the sector is contending with a series of official moves intended to calm the property market and reduce indebtedness among real-estate companies. 

Among other measures, regulators have told banks to cap property lending, and a system of “three red lines,” widely reported in local media, essentially requires financially weak players to reduce their debts.

However, much of the new debt is simply replacing maturing bonds, meaning that it doesn’t worsen company debt levels, while housing sales are growing rapidly. 

So analysts still expect most companies in the sector to come into compliance with the government’s deleveraging push.

Jefferies analysts forecast major developers are likely to grow sales by 20% for all of 2021.

The creditworthiness of most Chinese developers is likely to improve this year, said Luther Chai, a senior credit analyst at CreditSights in Singapore. 

“Even though most developers may still record a growth in total debt, we expect the pace of year-on-year debt growth to slow,” he said.

Official approvals for bond sales, both on and offshore, have largely been granted for refinancing existing debts, Mr. Chai said. 

In addition, Mr. Chai said strong so-called “contracted sales” in previous years implied developers were likely to enjoy robust revenue growth from this year onward.

A developer records a contracted sale when it finds a buyer for an apartment, but doesn’t recognize the revenue until it completes the unit. 

He said in turn, the revenue growth would help lower widely watched ratios such as debt to earnings before interest, tax, depreciation and amortization, or Ebitda.

The red lines might hinder growth but also served to make real-estate firms financially stronger, by letting them spend more on paying down debts, said Chris Yip, senior director at S&P Global Ratings.

S&P estimates at least half of the real-estate firms it rates won’t be in breach of any of the red lines by the end of 2021, up from roughly 10% in June 2020. 

Mr. Yip said some bonds were also issued with maturities of just less than one year to avoid the regulatory review they would otherwise face.

In effect, a gulf has opened up between the industry’s stronger players and the laggards.

Shares and bonds in China Evergrande Group, one of China’s largest property companies, have sold off recently, with its stock nearing lows hit in the March 2020 market panic. 

A report from Caixin, a Chinese news outlet, stoked investor concerns that it could face fresh regulatory scrutiny.

At the same time, Sunshine 100 China Holdings, Oceanwide Holdings and China Fortune Land Development have all defaulted on debts this year. 

China Fortune Land, whose primary business is developing industrial parks, has some $4.6 billion of dollar debt outstanding.

The defaulters were either relatively small or not typical residential developers, Mr. Yip at S&P , helping limit the damage to broader investor sentiment. 

“But obviously if we’re talking about a much larger company, or a typical residential developer, that could change the story quite drastically,” he said. 

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