January 13, 2015 / 11:28 AM / 5 years ago

Troubles at China's Kaisa mark watershed for offshore investors

HONG KONG (Reuters) - The specter of default hanging over China’s Kaisa Group, a property developer in seemingly reasonable financial health just two months ago, is forcing investors to rethink how they account for political risk when buying offshore Chinese corporate debt.

China’s real estate firms have made a beeline to the global offshore debt markets in recent years, lured by the relatively cheap borrowing costs compared with on the mainland.

Property companies listed in China or Hong Kong accounted for 61 percent, or $28.3 billion, of all high-yield bonds issued by Asian companies, excluding Japan and Australia, in the U.S. dollar market in 2014, according to Thomson Reuters data.

But Kaisa’s case has shown the conventional model of pricing property developers’ bonds by totting up their cash flows may no longer be sufficient in China.

Instead they need to take account of the growing risk of unexpected action by government authorities as well as taking more seriously the lack of precedence on what recourse offshore investors have over a company’s onshore assets.

That means companies are having to hold back from issuing new bonds as investors wait to see how events at Kaisa unfold, while the yields on existing bonds of property developers are pushing sharply higher.

“Kaisa’s case asks two big questions to the global investor community: How do you price in political risk when buying offshore debt of these companies and where do foreign investors stand in the hierarchy of creditors?” said a lawyer at a U.S. firm who has worked on cross-border corporate structures, but declined to be named because of the subject’s sensitivity.


Kaisa’s woes began late last year when it said government officials in the southern Chinese city of Shenzhen had unexpectedly blocked the sales of some of its property developments. That was followed by the abrupt departure of a string of executives, including its chairman, and then a missed coupon payment on one of its offshore bonds last week.

It has a 30-day grace period, starting from Jan 8, to make the interest payment or else become the first Chinese property company to default on its offshore debt.

On Tuesday, the bonds sold by Kaisa in the so-called “dim sum” market were trading slightly above 37 cents to the dollar, near a record low.

Up until Dec 3 last year they had been trading at 100 cents on the dollar, whilst in August the company reported a 34 percent rise in its net profit for first half of the year, suggesting all was well at the firm.

Kaisa officials did not respond to request for comment.

Their troubles have put a stop to the boom in bond issuance by Chinese property companies.

Traditionally January is a very busy month for high-yield issuers to raise funds either in the dollar bond or dim sum markets.

However, bankers and investors say they have yet to see any high-yield issuance from Chinese property companies so far and the next few weeks will remain tough for these issuers as investors are likely to demand a higher premium to buy their paper.

“We sold all our Kaisa dim sum bonds at the beginning of December and we are concerned about property names in the short term, especially those from Guangdong,” said an Asia-focused fixed income fund manager in Hong Kong, referring to the province in southern China where Shenzhen is located.

Funding costs for property companies in the dim sum and dollar markets have began to jump since Kaisa’s problems began, with traders saying there are few property bonds in the market that trade with a yield below 10 percent.

“A lot of issuers stopped issuing bonds because of the Kaisa event,” said Paul Au, Asia head of debt syndication at UBS in Hong Kong.

“The next few weeks will remain tough”.

Additional reporting by Umesh Desai; Editing by Rachel Armstrong

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