Chinese Developers’ Share Sales Good for Dollar Bondholders

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  • Post last modified:May 18, 2015
The $19.2 billion of share sales this year by Chinese developers is proving a boon for bondholders, boosting not only the indebted companies’ cash levels but also their ability to repay creditors.

The equity offerings by homebuilders since Dec. 31 are already more than the amount in any previous full year period, according to data compiled by Bloomberg, and mark a shift away from a reliance on bank loans and the offshore bond market for funds. Chinese high-yield notes have gained 5.03 percent this year versus 2.66 percent for dollar debentures in Asia more generally, Bank of America Merrill Lynch indexes show.

Dollar bond sales by developers from Asia’s biggest economy are down 52 percent this year after two companies defaulted on their U.S. currency debt. Renhe Commercial Holdings Co., a builder of underground malls, must find $79 million to repay a note that matures today. The rally in Chinese stocks has given developers an opportunity to use equity to raise capital to fund growth, as well as build a buffer against credit losses.

Increased equity financing will “make the Chinese property sector safer going forward,” said Maurice Meijers, a senior vice president of fixed income at Dutch money manager Robeco, which had 281 billion euro ($321 billion) of assets under management as of March 31. “It also shows Chinese builders are looking for other funding channels.”

Yield Premium

China Resources Land Ltd. has sold HK$10.1 billion ($1.3 billion) via a share placement, according to an e-mail Monday from the company’s investor relations department in response to questions. Yuzhou Properties Co. said in a May 12 statement it planned to sell HK$779 million of stock in its first equity issuance since its initial public offering in 2009.

The yield premium investors demand over U.S. Treasuries to hold China Resources Land’s $800 million of 4.375 percent 2019 bonds narrowed to a record low 195.87 basis points on April 27. The notes, sold at 99.773 percent of par in February 2014, are trading at 104.32 cents on the dollar, Bloomberg-compiled prices show. Yuzhou’s $300 million of 8.75 percent 2018 securities have returned 6.34 percent this year.

The Shanghai stock exchange’s property index has surged 150 percent over the past 12 months, outperforming the broader benchmark of Chinese shares, which has rallied 113 percent.

Greenland (Hong Kong) Holdings Ltd. in an announcement dated May 18 said it plans to raise HK$1.682 billion selling new shares. Cifi Holdings Group Co. is seeking as much as HK$1.175 billion in a top-up-placement, according to terms for the deal obtained by Bloomberg.

Cutting Leverage

“Historically, developers rely a lot on debt funding, which they use to buy land and for construction,” said Franco Leung, a Hong Kong-based senior analyst at Moody’s Investors Service. “Going to the equity market will lower their leverage and expand funding channels beyond bank loans and bonds.” That in turn will help control interest expenses, and improve their debt servicing abilities, he said.

China Resources Land’s equity financing should lower its adjusted debt-to-equity leverage by 2.4 percentage points to 42 percent, according to Moody’s estimates. Yuzhou’s would have sent its down by 1.9 percentage points to 60.7 percent.

Rated developers’ aggregate adjusted debt levels rose by 29 percent last year, almost twice as fast as contracted sales and revenue growth, the ratings companies said in a May 13 report.

According to Nomura Holdings Inc. analyst Jeffrey Gao, more developers will probably pursue equity financings given the recent surge in share prices.

Evergrande, Agile

Evergrande Real Estate Group Ltd. and Agile Property Holdings Ltd. are prime candidates to tap the equity market because they’re examples of developers with high leverage and high cash requirements, said Toni Ho, a Hong Kong-based analyst at RHB OSK Securities Hong Kong Ltd.

Evergrande had a total debt-to-equity ratio of 138.9 percent as at the end of 2014, while Agile’s equivalent ratio stood at about 103 percent, according to data compiled by Bloomberg. Evergrande’s stock is up 114 percent this year and Agile’s 47 percent.

China Resources Land said in a May 13 announcement that it plans to use the proceeds from its equity sale to buy land, and for development. Greenland will utilize some of its proceeds to develop its property-related Internet financing business, it said.

China’s real estate market is showing signs of recovery, especially in major cities like Beijing and Shanghai. New home prices fell year-on-year in April in 69 out of 70 cities tracked by China’s statistics bureau, compared with 70 cities in March, according to a statement posted on the bureau’s website today. Beijing new home prices rose 0.7 percent month-on-month and 0.6 percent in Shanghai. Existing home prices in China’s capital increased 2.1 percent in April from March.

“Growth is in Chinese developers’ DNA and the industry is in recovery phase,” said Rui Guo, a credit analyst at Mitsubishi UFJ Securities (HK) Ltd. “So the use of proceeds is most likely to fund growth instead of reducing debt.”