This year’s rally in Chinese property developer bonds is encouraging borrowers to return the market following the lack of credit availability at the end of 2011. Yet, property analysts advise treasurers to hold off from issuing too soon.
In a client report last week, Bank of America Merrill Lynch (BoAML) wrote that January's rally in corporate bonds also saw a tightening of yields on Chinese property deals.
"Average yield of larger developers tightened from 15.1% to 13.3%, and smaller developers tightened from 20.3% to 17.3%," said the report.
The improved sentiment around this set of borrowers is a positive step for property developers looking for refinancing.
However, Kaven Tsang, Moody's assistant vice president and analyst, believes even more favourable borrowing conditions may be available in 2013, explaining the market typically moves in a two-to-three year cycles. Given that China witnessed a downmarket in 2011 - and the challenging environment will likely to continue in 2012 - he expects market situation could stabilise in 2013 and 2014.
"If it’s in developers' minds to tap the market now for cheaper financing to pay for debt due in 2015 and 2016, I don't see any imminent need to tap the market," he said. "Why do they need to raise funding now for three or four years down the road?"
The advice is pertinent as many property developers have a large volume of bonds to maturing over the next few years.
According to the BoAML client report, US$3.6 billion, US$5 billion and US$4.1 billion worth of bonds will come up for redemption in the three years of 2014, 2015 and 2016, respectively. The pressure to recapitalise these costs will prompt many developers to enter the market to take advantage of the recent pickup, the bank predicts.
However, Danny Bao, head of Hong Kong and China property at Daiwa Capital Markets, offers a different reason for developers to hold off immediate issuances. Bao says the decision by the People’s Bank of China to tighten credit lending in 2011 is set for a reversal in the coming months as their efforts to cool the property market's growth appear to be working. With this in mind, he advises potential issuers wait to weigh their bank lending options before rushing to sell bonds at a higher borrowing rate.
"Developers were able to borrow from banks in the second half of last year at a rate of 8%-10%. They can issue high yield bonds with 10%-13% coupons and can borrow from domestic trusts for 10%-20% interest, all expiring within two to three years," said Bao, adding that issuers of off-shore high yield bonds usually have a three-to-seven-year maturity, while on-shore domestic trusts set maturities at two-to-three years.
"We don’t know where the yield will trend after the government institutes a policy change, but the change will be advantageous to these developers and cheaper than other funding options,” he continued. “I think property developers should wait and see what's going on with the market first."
In this case, not only would approaching banks be cheaper, but it would give developers a chance of avoiding global investors who may not be ready to receive the sector’s high-yield borrowers.
While the environment does look more open for Chinese bond issuers, global debt lenders have a clear preference for investment-grade issues rather than the rush to high-yield bonds seen one year ago. This investor aversion to high-yield has been attributed to corporate governance problems linked to companies such as Sino Forest and China Forestry.
This narrows the pool of property issuers that can come to market, and suggests that the benefits of a more favourable investor market may be beyond the mainland real estate developers who need it most.
“The one set of property developers who will be qualified to issue bonds in the overseas market have to be big, financially sound and have a strong name, but ironically these are not the ones that are desperate for cash,” said an Asian equity researcher in Hong Kong. “I don’t see a wave of Chinese property developers selling bonds overseas because quality will be an issue.”
Credit quality is still an issue in the sector. Moody’s stated in a report last week that rated Chinese property developers “accounted for almost 40% of the region’s negative rating actions due to weaker-than-expected contract sales amid a lacklustre market characterised by tight liquidity, and in some cases, continued aggressive build up of land banks.”
BoAML’s outlook for 2012 also doesn’t bode well for struggling players in the industry. According to the bank, the market is poised to see a 20% year-on-year decline in nationwide property sales and a 10% decline in both volume and price.