* Record number of bonds suggests overheating
* Developers taking additional loans as well
* Ability to repay debt being questioned
By Nachum Kaplan
Jan 31 (IFR) - Divergent views are emerging over whether
there is a bubble building in the Chinese property sector, which
has produced a string of aggressive high-yield issues this year,
the most recent of which was Greentown China's conveniently
successful US$400m bond this week.
The recent hot flow of money into Chinese high-yield
property bonds, much of it from private banks unable to earn a
decent return elsewhere, had the look and feel of a sector
overheating, and many have indeed traded down in secondary.
If it looks like a bubble and inflates like a bubble, then
it will ultimately pop like a bubble.
Not everyone thinks there is a bubble, however. Moody's
certainly does not and has said in a report that the recent
spate of bond issuance had actually shored up the sector's
liquidity and generally extended many issuers' maturity
profiles. Add in the sector's stronger than forecast sales
growth, and the agency believes the Chinese property sector
actually had an improved credit profile.
What lies behind the discordant views? Much of it hinges on
whether one thinks it is a liquidity squeeze or a fundamental
inability to repay debt that might get the sector into trouble.
Borrowing money certainly gives a company more liquidity and can
provide an easier repayment schedule.
That's what many Chinese property companies have been doing
- refinancing short-term debt with longer-term facilities and on
pretty cheap terms, too. That is smart and it certainly
mitigates refinancing risk. Credit risk, however, is about more
than just liquidity and refinancing risk. It is also about the
fundamental ability to repay debt, and that is the shakier part
of the equation.
China's property companies are not just taking advantage of
low rates and abundant liquidity to refinance debt; they are
aggressively taking on more debt in the form of loans.
Outstanding loans to Chinese property companies rose 13% last
year to Rmb12.11trn, while loans to developers (land and
property) rose 11%, according to a report by Morgan Stanley.
It is axiomatic that the more money a company owes the
harder it will be to repay, regardless of maturity profile.
Yes, one can take the view that Chinese property's robust
sales growth justifies the extra debt property companies are
assuming. That view is utopian. Such strong sales growth,
especially in the face of the extensive measures the Chinese
government has taken to cool the property sector, looks like
strong evidence that the market is overheating - and vulnerable
to a correction. When that happens, this debt the sector is
assuming will suddenly look much less affordable.
Prices in the secondary bond market increasingly reflect
this more negative view. While many of these property issuers
may have amusing names, less funny is their performance in
secondary. This year's deals for Agile Properties, Powerlong,
Fosun International, Longfor and Future Land are all trading
Optimists, however, might argue that the market has not
really lost confidence in the sector and point to the success of
the most recent Chinese property deal, Greentown's US$400m
five-year non-call three bond. The deal was increased from
US$300m and got away at 8.5%, well inside the 9% price talk,
thanks to a US$2.8bn order book.
The success of Greentown's bond is illusory, however. Far
from showing the market still has appetite for the property
sector, it shows the exact opposite.
An unusually high 25% of the deal went to corporate
investors rather than true bond investors. Premier Hong Kong
corporate Wharf Holdings, which owns 24.6% of Greentown, was
among the corporate buyers of the paper. It is not known how
much of the corporate bid Wharf Holdings accounted for, but such
actions hardly indicate confidence in the market.
The market is not always right, of course, but in this
instance it would take a brave person to bet against it.