China builders seize window for bond issues

SINGAPORE - China's property developers ended a month-long drought in the US dollar high-yield bond market this week, taking advantage of renewed interest in the sector following the central bank's interest rate cut.

Logan Property, Yuzhou Properties and Sunac China Holdings all tapped the market, raising a combined US$900 million. Greenfield project developer Zhuhai Da Heng Qin is currently marketing a debut offshore renminbi bond, while China Aoyuan Property is also gearing up to issue a Dim Sum deal.

"Property companies will continue to access the offshore bond market on an opportunistic basis given the importance of pre-funding maturities," said Charles Macgregor, Singapore-based head of Asia at Lucror Analytics, which has a stable outlook on the sector.

"Our outlook is driven by a sense that the central government will continue to adjust policies and interest rates to maintain momentum."

Offshore bond sales from the Chinese property sector have slowed significantly since Agile Property's bonds were hit in mid-October following the detention of the company's chairman. Sentiment, however, has improved following the first interest rate cut in almost two years.

Since the People's Bank of China cut the lending rate by 40bp on Nov 21, Chinese real estate bonds have rallied 1 to 2 points, creating a positive backdrop for Chinese developers to tap the market.

"China property is the most credit-condition sensitive part of Asia high yield, and thus easing represents a golden opportunity to cut inventories and leverage," Viktor Hjort, Hong Kong-based head of fixed income research at Morgan Stanley, wrote in a research note on November 26.

Indeed, all three of this week's issuers said they would use the proceeds to repay debt. Analysts said the developers are also likely to use the funds for land acquisition as land prices have fallen amid a continued slowdown in China's property market.

"The recent issuance rush by Chinese developers is driven by the need to pay down expensive domestic debt including trust loans and funding requirements for land acquisition," said Kenny Wu, Hong Kong-based credit analyst at Citigroup.

"Chinese developers have been holding off on land acquisition for the last six months and now they are looking to replenish land banks - due to softer land prices - for next year's development."

Volumes of US dollar-denominated high-yield new issues from Chinese developers so far this year have fallen to US$13.3 billion from 35 deals, lower than the full year volume of US$14.75 billion last year from 42 deals. Bottoming out?

Investors believe China's housing sector is showing signs of bottoming out, helped by a series of stimulus measures including a relaxation on home purchase restrictions and easing of mortgage lending.

Based on data from China Index Academy, average new home prices in China's 100 major cities dropped 0.38 percent in November from October, the seventh month-over-month drop but a slight improvement from a 0.4 percent drop in the previous month. Sales volume in major Chinese cities continued to increase 3.7 percent in November from October. First-tier cities, in particular, saw sales volume jump 12 percent in November.

Individual Chinese developers have also been reporting better sales in recent months.

"Contracted sales numbers from various Chinese developers show that the sector is bottoming out, helped by a number of stimulus measures from the government," said a Hong Kong based-hedge fund analyst specialising in China real estate bonds. "But it will still take time for the sector to turn around."

Meanwhile, for those attempting to ride the optimism to tap the bond market, the window may not last for long as the sector faces heightened headline risk amid an ongoing anti-corruption investigation in China.

Kaisa Group in October denied reports that its chairman Kwok Ying Shing had been detained, but its bonds were hammered again on December 3, falling five points on Chinese media reports that it had been blocked from selling some of its projects in Shenzhen. In an announcement the following morning, the company said it was aware that local regulators had restricted pre-sales on three projects, but had not received any notification and was unaware of the reason for the action.

Softer conditions in the wider market may also make it harder for others to follow suit. Chinese high-yield bonds, the majority of which are from the property sector, were dragged down by half a point in the first half of this week. The three new issues were all slightly wider in secondary on Wednesday.