* Onshore loan default by developer causes offshore sell-off
* Analysts expect more bad news to surface
* Fundamentals have not changed, but volatility has
By Christopher Langner and Lianting Tu
SINGAPORE, March 18 (IFR) - Bonds from Chinese property
developers are struggling after local media reports that a
property company in Zhejiang province had defaulted on loans
amounting to CNY3.5bn (USD566m).
The most liquid dollar bonds of leading property companies
sank as much as one and half points yesterday following news
that Zhejiang Xingrun Real Estate, a provincial
developer, is unable to repay its bank debt.
The move underscored the heightened headline risk of
dollar-denominated high-yield bonds from China after the first
onshore bond default, from solar cell maker Chaori, two weeks
ago. "It is sobering," said a portfolio manager.
"We are expecting more negative headlines from the sector in
the near-term as we get clean March monthly contract sales data
from each company," said a credit analyst in Singapore. As a
result, he said, his shop is a short-term bear.
In the past two years, Chinese developers have issued
USD40bn in foreign currency bonds, the result of a combination
of onshore lending restrictions and low US dollar interest
The China property sector now accounts for some 40% of
Asia's two biggest high-yield debt benchmarks, the Merrill Lynch
and the JP Morgan Asian Credit indices.
With so many bonds outstanding from the sector and the
recent news of the first default by an onshore bond issuer,
foreign investors have become extra cautious.
That effect is likely to be felt as more defaults are
reported. Analysts warn that smaller developers, in particular,
are under pressure.
"We see polarization of performances between smaller players
and bigger developers. We expect many more defaults from smaller
developers," said Bei Fu, an S&P analyst on Chinese real estate
The main risk is limited funding channels for smaller
players. "Big banks have a list of approved clients which
usually don't include small developers; small lenders are
volatile themselves; and trust loan availability will be limited
after two high-profile defaults earlier this year," she added.
Another analyst noted that there could be more coming from
the province where Xingrun is based. "Zhejiang is pretty rife
with shadow banking and trust financing," he noted. "It isn't
the first time a developer there faced default issues -
Greentown back in 2008 is the best example of a Zhejiang based
developer which encountered liquidity issues."
Greentown China ultimately overcame its issues thanks to
Hong Kong Blue Chip Wharf Holdings, which bought a 24.6% stake
in the company, an equity injection that not only helped it stay
afloat but boosted its credit rating from a Triple-C level. It
is now rated B2 by Moody's and BB- by Standard & Poor's.
SHORT TERM BEARS
In spite of the bond market sell-off, most investors took
the news in their stride. "[I'm] not sure how a Rmb3.5bn default
by one small onshore developer means that some of the bigger
developers are about to default," said a hedge fund manager.
Equity investors, in fact, completely ignored the headline.
The share price of Greentown rose on Monday, while KWG Property
Holdings, which reported better than expected earnings, saw its
stock soar 9.97%.
KWG's dollar bonds due 2019, however, ended yesterday 25
cents weaker in price terms, still better than Evergrande's 2018
bonds, which finished one and a half points down. "It was
bottom-up in the bond universe," noted the analyst.
In spite of the short-term dismal prospects, though, bond
investors are hardly ready to jump out of the Chinese property
sector altogether. "Obviously [the headlines are] not good, but
I think investors don't amalgamate," said a senior DCM banker in
Indeed, most investors contacted by IFR seemed to be more
worried about the earnings season for Chinese developers than
the fact that a small private company in a secondary region of
the country had missed its loan payments.
An analyst in China had an even more pragmatic view. He said
he was not surprised about the default and added that
non-performing loans from Chinese developers have been on the
He also said that Zhejiang is probably one of the provinces
where prices have dropped the most, especially in the city of
Wenzhou, where there seems to have been a lot of speculation
around beachfront property.
He concluded that accounts receivables of the company had
been on the rise and its turnover had slowed, so, put simply, it
did not get paid in time to pay back lenders.
In short, the fundamental issues of Chinese developers
remain the same and are unlikely to detract global investors
from buying their bonds any more than they did before. But since
the onshore bond default, investors have suddenly become more
sensitive to headlines.
Which means that, for now, the sector is a good play only
for those who can stomach volatility. "The world is still pretty
nervous - which is partially correct as liquidity and sales are
definitely slower," said the hedge fund manager.
"I therefore think we go lower [in price terms] on a lack of
buyers before getting to mid-year and realizing that they
[Chinese developers that issue global bonds] are all - hopefully
- still standing."
(Reporting By Christopher Langner and Lianting Tu; Editing by
Sudip Roy and Julian Baker)