China’s high yield property comeback spells trouble for southeast Asian issuers
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China’s high yield property comeback spells trouble for southeast Asian issuers


The success this week of 2015’s first high yield property bond from China has sparked talk of a post-Chinese New Year comeback for the much maligned sector. While this bodes well for the Chinese, the opposite holds true for southeast Asian issuers, which had stepped up to fill the gap, writes Rev Hui.

A staple of the Asian bond market, Chinese property developers have been mostly absent this year after the sector experienced its first offshore bond default in January when Kaisa Group Holdings’ failed to pay the coupon on its $500m 10.25% 2020.

No explanation was given for the company’s sudden deterioration, which created widespread concern that others could suffer the same fate.

“It’s no secret that the start of the year has been very tough for Chinese property, and especially for high yield names, which were forced to the sidelines,” said a Hong Kong based syndicate banker.

The sector, however, experienced a strong rebound in the week of January 23, with high yield Chinese property names trading up by an average of six to eight basis points.

That rally brought the appearance of the first Chinese property bond, investment grade rated a $1.2bn dual trancher from investment grade rated Sino-Ocean Land Holdings on January 28.

The success of that trade provided Ba2/BB/BB+ rated Shimao Property Holdings with the perfect platform to launch the year’s first Chinese high yield property bond less than a week later.

Improved sentiment

Shimao did not disappoint (see separate story), amassing an order book of more than $5.6bn. And one Hong Kong based DCM banker who was working on the trade reckons the market is finally ready for more high yield Chinese real estate issuers.

“There were definitely a few things going for us, but the most important factor was capturing the window right after the rebound and Sino-Ocean’s bond,” the DCM banker said. “There’s been close to no high yield supply this year so there are a lot of accounts itching to put their money to work. The question was whether the market is stable enough for them to invest.”

An example of this new found stability was shown at the start of February, when once again it was Kaisa that threatened to derail the Chinese property market with yet more bad news.

On February 1 the troubled developer announced the sale of four projects to fellow industry peer Sunac China Holdings, which went against market expectations that Sunac was going to purchase a stake in the firm. If that was not enough, the firm announced a day later that its chief executive Jin Zhigang had quit to "devote more time to his personal career".

“That gave us a bit of a scare, but thankfully the market took it as a credit-specific event,” the DCM banker said. Kaisa’s bonds were down by around 15bp from February 2-3, while the broader Chinese property market widened by only one to two basis points.

Base to build on

Market participants said there is now a clear disconnect between Kaisa and the rest of the sector, which bodes well for Chinese property developers waiting on the sidelines. “I don’t think any more news from Kaisa, or Shenzhen for that matter, will affect investor sentiment unless it’s something crazily drastic,” the DCM banker said.

The market is starting to pick up, he said, and it is only a matter of time before other banks try to take advantage of the momentum generated by Shimao and launch Chinese high yield property deals of their own.

The flood of issuance could be huge, as Chinese property represents more than 40% of Asia’s high yield bond market, which has around $12.4bn of bonds maturing or callable this year.

Still, not all of those will result in new issues since many companies began pre-funding last year. And even if these companies are looking to issue, they are unlikely to come before Chinese New Year, for which the holiday period starts on February 18. Liquidity tends to dry up in the week leading up to the holiday as investors start closing their accounts.

“It’s unfortunate, because what you want is to immediately tap into the increased optimism, but I think we’ll only start seeing more after Chinese New Year,” the DCM banker said. “The window is too tight.”

China versus SEA

While bankers are excited by the expected return of Chinese high yield property and the chance for them to clear a backlog of deals, one particular group of the market is unlikely to share their enthusiasm — southeast Asian issuers.

In the absence of their Chinese peers, southeast Asian names have helped to plug the gap in the Asian high yield sector. Indonesian telecommunication service provider Tower Bersama tapped the market for $350m on February 3, while Philippine borrower International Container Terminal Services wrapped up a $300m perp with tender offer at the end of January.

On top of those two, Philippine property developer Century Properties and Indonesian energy company MAXpower Group are receiving bids for their respective dollar bonds, while another telecommunication service operator — Solusi Tunas Pratama (STP) — is on the road for a dollar bond.

The increased activity from the Philippines as well as Indonesia, according to the head of syndicate in Singapore, is down to the fact that both countries have seen their economies improve in recent years.

“Philippines and Indonesia received a rating upgrade last year, which really ramped interest in their credits up,” the Singapore banker said. “Plus, they offer investors a nice alternative, especially when there are ongoing concerns about China’s slowing economy and real estate sector.”

But, for the same reasons, the Hong Kong based syndicate banker is worried that the recent resurgence of Chinese credits will greatly hampered interest in southeast Asian credits. He points out that the impact is already starting to show, as both MAXpower and Century Properties have extended bookbuilding to a second day — a sign that all is not well (see separate story).

“Shimao took away a lot of attention from the southeast Asian names, which hit those two companies hard. If one Chinese property developer coming back is able to do that, you have to wonder what is going to happen after Chinese New Year when the whole lot of them returns,” he said.