Chinese developers seek alternative financing as investors grow wary

BEIJING — China’s property developers are turning to commercial mortgage-backed securities (CMBS) and other alternative financing as creditors grow more discriminating in the face of rising concerns about the country’s real estate and debt markets.

Creditors are becoming increasingly nervous because property sales in Asia’s largest economy have cooled as overall growth slows. The bankruptcy of a local developer and the country’s first domestic bond default this month have also heightened scrutiny of borrowers.

The property companies have a renewed sense of urgency to raise capital after United States Federal Reserve Chairman Janet Yellen indicated the central bank, which sets the tone globally for borrowing costs, may raise interest rates as early as spring next year, from March to June 2015, sooner than many investors had anticipated. Higher rates mean higher borrowing costs, both for the companies and for their home-buying customers.

Highlighting the search for alternative funding avenues, property fund MWREF this month issued the first cross-border offering of CMBS since 2006. The offer was priced at a yield lower than two US dollar bonds issued last week, said IFR, a Thomson Reuters publication.

“The market will see more of these products,” said Kim Eng Securities analyst Philip Tse in Hong Kong. “It’s getting harder to borrow with liquidity so tight in the bond market. It’s getting harder for smaller companies to issue high-yield bonds.”

The notes, issued through a MWREF subsidiary, Dynasty Property Investment, are backed by rental income from nine MWREF shopping malls in China and were structured to give offshore investors higher creditor status than is normally the case with foreign investors. MWREF is managed by Australian investment bank Macquarie Group, which declined to comment.

Mr Bryan Feng, the Head of Investor Relations for Beijing Capital Land, which is mainly focused on middle- to high-end residential and commercial property, said the company would look at new ways to fund its business. Beijing Capital was the first Hong Kong-listed developer to issue US dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.

“As market liquidity is changing constantly, we have to keep adapting and exploring different funding channels,” said Mr Feng.

Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure and Join.In Holding to offer a private placement of shares, opening up a fundraising avenue that had been closed for nearly four years.

New rules were also unveiled last week allowing certain companies to issue preferred shares, including companies that use proceeds to acquire rivals.

“As liquidity tightens and developers see more pressure ... they may consider mergers and acquisitions via preferred shares,” said Macquarie analyst David Ng.

FINANCING RISKS

Fears over the outlook for China’s property developers heightened this month on news that home price inflation is cooling and after Zhejiang Xingrun Real Estate became bankrupt after failing to service more than 3.5 billion yuan (S$717 million) in outstanding debt.

“The bankruptcy appears to be an isolated incident, but it highlights the vulnerability of small, highly-levered developers,” said Mr Kaven Tsang, an analyst at rating service Moody’s.

Still the rating firm warned that the bankruptcy could prompt banks to become more cautious in managing their exposure to the property sector.

China also recorded its first domestic bond default when loss-making Shanghai Chaori Solar Energy Science and Technology failed to make an interest payment. The market jitters have slowed the pace of new debt issuance and prompted investors to demand bigger premiums to risk their capital.

As at March 15, Chinese developers had issued 15 US dollar bonds raising US$7.1 billion (S$9 billion) this year, compared with 23 issues that raised US$8.1 billion in the year-earlier period.

“That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital,” said Ms Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.

However, offshore syndicated loans for Chinese developers have reached US$1.2 billion so far this year, compared with US$9.8 billion for all of last year, Thomson Reuters data shows.

Demonstrating the change in investor sentiment, bonds issued by Kaisa Group in January with a yield of 8.58 per cent are now yielding 9.5 per cent. Times Property issued a five-year bond this month, not callable for three years, to yield 12.825 per cent.

A similar instrument from China Aoyuan Property in January was priced at 11.45 per cent. Both Kaisa and Times are in the B-rating “junk” category, which is four notches above a default rating.

Property prices on the whole are still rising, but there are signs of stress in second- and third-tier cities. Early indications of property sales this month, traditionally a high season, were not promising, although final figures would not be available until next month, said Ms Agnes Wong, property analyst with Nomura in Hong Kong. That may mean developers have to cut prices and investor sentiment may worsen.

The market stresses ultimately could lead to the reshaping of the property development sector, said Mr Kenneth Hoi, Chief Executive of Powerlong Real Estate Holdings, a mid-sized commercial developer.

“In the future, only the top 50 will be able to survive. Many small ones will exit the market,” he said. AGENCIES