November 20, 2018 / 1:14 PM / a month ago

UPDATE 1-China property developers face new normal: double-digit bond yields

(Adds analyst comments)

By Julia Fioretti

HONG KONG, Nov 20 (Reuters) - Times China Holdings sold a three-year bond in January at a yield of 6.25 percent, now the Chinese property group is having to offer almost double that on a two-year deal, highlighting rising financing costs for Chinese developers.

The 11 percent yield on Times China’s bond also shows the impact of rising U.S. interest rates and growing investor aversion to risk in China’s cooling property market.

Growth in China’s real estate investment in October slowed to a 10-month low and home sales fell again, as developers held back expansion plans in the face of softening conditions.

Another property company Evergrande Group, which earlier this month sold a jumbo $1.8 billion of bonds with coupons among the highest in the market, late on Monday sold an additional $1 billion of two-year bonds at 11 percent.

At the time of the $1.8 billion sale, bankers and analysts warned the high coupons offered by heavily-indebted Evergrande would pile pressure on rival developers and push up borrowing costs all around.

That is now playing out as developers rush to market — offering ever-higher coupons to attract investors — before their offshore borrowing quotas expire at the end of the year.

“BB-rated issuers now have to pay 10-11 percent for short two-year funding and it is going up every week. Mid-teen yields seem possible now as worst case scenario,” Owen Gallimore, corporate credit analyst at ANZ, said.

Developer Agile Group sold a three-year bond in July at a yield of 8.5 percent, but last week paid 9.5 percent for $400 million in two-year bonds, rated BB by S&P.

Greenland Holdings also tapped the market this week, selling a 1.5-year $200 million bond at a yield of 9.25 percent on Monday, according to a term sheet seen by Reuters. That compares with a one-year bond it sold in June with a yield of 7.875 percent.

Only 15 companies across Asia-Pacific have paid double-digit rates for bonds of at least $100 million with similar tenors in the past two years, according to Refinitiv data. Twelve of those are Chinese property developers.

“If you’ve got 25 people in a room wearing purple you’d feel a bit less embarrassed about wearing purple,” said a senior debt capital markets banker about the high yields.

The re-pricing comes as developers face a combined $96.1 billion of both onshore and offshore bonds maturing next year, according to Refinitiv.

Bankers say it has become increasingly difficult to get deals done, as investors demand higher premiums in return for buying junk bonds and shy away from longer-dated issues.

“What used to be interesting at 7 percent is definitely not interesting at 7 percent or even 9 percent now,” Manjesh Verma, head of Asia credit sector specialists at Citigroup, said.

And the higher yields push down the prices of existing bonds, making 2018 an extremely bad year for investors.

Times China’s January bond is now trading at 90.8 cents on the dollar, while Agile’s July bond is down to 96.6, pushing the yields to 11.16 percent and 9.94 percent, respectively.

“The market price has moved quite a bit this year,” said Steve Wang, senior credit analyst at CITIC CLSA.

A slowdown in broader economic momentum is feeding through to parts of the property sector, a key driver of gross domestic product. In the third quarter, China’s economy expanded at its weakest pace since the global financial crisis.

Reporting by Julia Fioretti; Editing by Kim Coghill and Jane Merriman

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