China Property Bust - Has it Finally Started?

June 1, 2010 - PRLog -- Dollar bonds sold by China real estate companies this year are the worst performers among Asian non-financial corporate debt denominated in the U.S. currency amid concern the nation’s property market is overheating.

Yields on the $3.9 billion of bonds issued by Kaisa Group Holdings Ltd., Country Garden Holdings Co. and seven other developers since January widened by an average 2.26 percentage points relative to Treasuries as of last week, according to data compiled by Bloomberg.

That’s more than the 2.05 percentage- point increase in spreads for the seven dollar-denominated bonds sold by other companies in Asia outside Japan.

Investors are demanding greater yields to lend to China property firms,

a sign they expect borrowers will have a harder time meeting debt payments amid a government clampdown down on lending.

Goldman Sachs Group Inc. and Credit Suisse Group AG cut their profit estimates for Chinese real estate companies after a 12.8 percent jump in real estate prices in April from a year earlier spurred the state to increase regulation.

“New issues by Chinese developers will stall for the time being,” Vince Chan, the Hong Kong-based chief credit strategist with Amias Berman & Co. LLP, a fixed-income advisory and brokerage firm founded by two former Citigroup Inc. bankers, said in a phone interview.

“Investors need handsome rewards for getting exposed to weaker fundamentals.”

The amount of dollar bonds issued by China developers represents 45 percent of all corporate dollar debt sales in Asia outside Japan this year, Bloomberg data show.

The yield spread on $350 million of 13.5 percent notes sold by Shenzhen-based Kaisa last month widened the most of the nine issues,

expanding to 16.52 percentage points from 11.07 percentage points, Nomura Holdings Inc. prices on Bloomberg show.

Kaisa is developing 18 projects in Shenzhen, Dongguan and other cities in the Pearl River Delta,

most of them high-rise residential complexes that combine recreational and commercial space, according to its website.

An investor who bought the company’s 2015 bonds at par would have lost 15.5 percent.

Elsewhere in credit markets, the extra yield investors demand to own company debt instead of Treasuries widened 5 basis points last week to 193 basis points, or 1.93 percentage points, Bank of America Merrill Lynch index data show.

The spread, which peaked at 511 on March 30, 2009, is up from this year’s low of 142 on April 21.

Average yields rose to 4.06 percent, the highest based on weekly closes since the period ended March 5.

Corporate bond issuance worldwide slowed this month to $66.1 billion, down from $183 billion in April and the least since December 2000, according to data compiled by Bloomberg.

“Companies have to be prepared to strike and strike quickly,” Rick Martin, the London-based director of treasury at Virgin Media Inc., the U.K.’s second-largest pay-television company, said at a May 28 briefing in London.

“The key is to have the team ready and primed and able to pull the trigger at short notice. I can’t think of a time when the forces have been so polarizing.”

The cost to insure U.S. corporate debt against default rose last week.

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