| HONG KONG, March 27
HONG KONG, March 27 China's property developers
are turning to commercial mortgage-backed securities and looking
at other alternative financing as creditors grow more
discriminating in the face of rising concerns about the
country's real estate and debt markets.
Bond buyers are shying away from second-tier developers
because property sales have cooled as the economy slows. The
expected bankruptcy of a local developer and the country's first
domestic bond default this month have heightened scrutiny of
The property companies have a renewed sense of urgency to
raise capital after U.S. Federal Reserve Chairman Janet Yellen
indicated the central bank, which sets the tone globally for
borrowing costs, may raise interest rates as early as the spring
of 2015, sooner than many investors had anticipated. Higher
rates mean higher borrowing costs, both for the companies and
for their home-buying customers.
Highlighting the search for alternative funding avenues,
property fund MWREF Ltd earlier this month issued the first
cross-border offering of commercial mortgage-backed securities
(CMBS) since 2006. The offer was priced at a yield lower than
two dollar bonds issued last week, IFR, a Thomson Reuters
"The market will see more of these products," said Kim Eng
Securities analyst Philip Tse in Hong Kong. "It's getting harder
to borrow with liquidity so tight in the bond market. It's
getting harder for smaller companies to issue high-yield bonds."
The notes, issued through a MWREF subsidiary, Dynasty
Property Investment, were ultimately backed by rental income
from nine MWREF shopping malls in China and were structured to
give offshore investors higher creditor status than is normally
the case with foreign investors. MWREF is managed by Australian
investment bank Macquarie Group Ltd, which declined to
The head of investor relations for Beijing Capital Land
, which is mainly focused on middle- to high-end
residential development and high-end commercial property, said
the company would look at new ways to fund its business.
Beijing Capital was the first Hong Kong-listed developer to
issue dollar senior perpetual capital securities last year, an
equity-like security that does not dilute existing shareholders.
"As market liquidity is changing constantly, we have to keep
adapting and exploring different funding channels," said Bryan
Feng, the head of investor relations.
Chinese regulators last week allowed developers Tianjin
Tianbao Infrastructure Co. and Join.In Holding Co.
to offer a private placement of shares, opening up a
fund raising avenue that had been closed for nearly four years.
New rules were also unveiled last week allowing certain
companies to issue preferred shares, including companies that
use proceeds to acquire rivals.
"As liquidity tightens and developers see more
pressure...they may consider M&A via preferred shares," said
Macquarie analyst David Ng.
Heightened fears over the outlook for China's property
developers were triggered by news this month that home price
inflation is cooling and that Zhejiang Xingrun Real Estate Co,
based in eastern Zhejiang province, was on the brink of
China also recorded its first domestic bond default when
loss-making Shanghai Chaori Solar Energy Science and Technology
Co Ltd failed to make an interest payment, raising
doubts about the assumption high-yield debt carried a government
The market jitters have slowed the pace of new debt issuance
and prompted investors to demand bigger premiums to risk their
As of March 15, Chinese developers had issued 15 U.S. dollar
bonds raising $7.1 billion so far this year, compared with 23
issues that raised $8.1 billion in the year-earlier period.
"That said, quite a number of developers have demonstrated
the ability to access alternative markets, such as the offshore
syndicated loan markets as another means of raising capital,"
said Swee Ching Lim, Singapore-based credit analyst with Western
Offshore syndicated loans for Chinese developers have
reached $1.17 billion so far in 2014, compared with $9.8 billion
for all of last year, Thomson Reuters LPC data shows.
Demonstrating the change in investor sentiment, bonds issued
by Kaisa Group in January with a yield of 8.58
percent are now yielding 9.5 percent. The company did not
immediately respond to a request for comment.
Times Property issued a 5-year bond this month, not callable
for 3 years, to yield 12.825 percent. A similar instrument from
China Aoyuan Property in January was priced at 11.45
percent. Both Kaisa and Times are in the B-rating "junk"
category, which is four notches above a default rating.
Property prices on the whole are still rising, but there are
signs of stress in second and third tier cities.
Early indications of property sales in March, traditionally
a high season, were not promising, although final figures for
the month would not be available until April, said Agnes Wong,
property analyst with Nomura in Hong Kong. That may mean
developers have to cut prices and investor sentiment may worsen.
"This is hurting the cash flows of the smaller players," she
The market stresses ultimately could lead to the reshaping
of the property development sector, said Kenneth Hoi, chief
executive of Powerlong Real Estate Holdings Ltd, a
mid-sized commercial developer.
"In the future, only the top 50 will be able to survive," he
said during a briefing on the company's earnings on March 13.
"Many small ones will exit from the market."
(Additional reporting by Nethelie Wong at IFR; Editing by Emily
Kaiser and Neil Fullick)