Developers put trust in buybacks

IFR Asia 1221 - 22 Jan 2022 - 28 Jan 2022
6 min read
Emerging Markets, Asia
Carol Chan, Morgan Davis

Chinese property developers are actively buying back offshore bonds to try to demonstrate they have liquidity during the sector-wide crisis, but the small sizes are not doing much to restore investor confidence.

In the week beginning January 17, at least five developers – Country Garden Holdings, Zhongliang Holdings Group, Agile Group Holdings, Sunkwan Properties Group and CIFI Holdings (Group) – made voluntary announcements about bond repurchases totalling around US$60.8m-equivalent in principal amount on the Stock Exchange of Hong Kong.

At a time of widespread market weakness and investor caution, bond repurchases have become a way for issuers in the troubled Chinese property sector to send a positive message to the market.

The repurchase total was a drop in the ocean, though, considering the five developers have a combined US$22bn in US dollar bonds outstanding, according to Refinitiv data.

The bonds were trading at cash prices as low as the 60s when the repurchases were made, allowing companies to make savings on future repayments by buying them below face value.

One real estate company executive said that announcing buybacks publicly, even for small amounts is “a good gesture”. Some companies have also disclosed that top executives have bought bonds themselves, which telegraphs that they have skin in the game, he said.

While investors have not always responded as well to these moves as the companies hoped, the executive expected developers would continue to announce buybacks.

One day before maturity

In many cases, companies bought back their bonds and made their disclosures immediately after their bond prices slumped. Many of them are also buying back bonds just a few weeks or months before the maturity date. Sunkwan said on Friday it had repurchased US$6m in principal of its 12.75% January 21 2022 bonds just one day before maturity.

Although developers do not usually disclose purchase prices, they tend to be substantially below face value. Sometimes the move helps support bond prices.

During the week, Country Garden saw its bond prices rebound on January 18 following the company's US$10m bond buyback disclosure on January 17, comprising US$5m in principal of its 4.75% notes due July 2022 and US$5m of its 7.25% notes due April 2026.

The news allowed Country Garden's US dollar bonds to recover around six points, about two-thirds of what they lost on January 17, bringing their notes back up to the high 60s to low 70s.

A Country Garden spokesperson said the company has sufficient funds and is in a stable financial position. “The company hopes to send a positive signal to the market through the repurchasing of the senior notes to enhance confidence of long-term investors,” said the spokesperson.

“The company will pay close attention to market conditions and continue to repurchase if the condition is right."

While most bond repurchase announcements came late at night, Agile made its disclosure during lunch hours, just a few hours ahead of downgrades by rating agencies. It somewhat helped to mitigate the negative rating news, said market participants.

Agile said in its filing that it had repurchased on January 14 US$10m in principal of its 6.7% senior notes due on March 7 2022.

Moody's downgraded Agile’s issuer rating to B1 from Ba2, while S&P lowered Agile’s issuer rating to B+ from BB–, both with negative outlooks, citing increased refinancing risk.

Among the developers announcing bond buybacks last week, Zhongliang, a relatively new name compared to the other three, has been the most aggressive. It made seven repurchase filings in October, three in November, two in December, and two in January so far.

In its latest filing dated January 17, Zhongliang said it had bought a further US$31.693m in principal of its 7.5% notes maturing on January 31 2022.

CIFI, which had bought back US$265.117m in principal amount of its 5.5% 2022 bonds under a tender offer priced above par earlier this month, on Wednesday announced it had repurchased Rmb20m (US$3.15m) of its 6.7% Dim Sum bonds due April 2022.

Neutral on ratings

Adrian Cheng, co-head of China property at Fitch, believes bond buybacks are at best neutral for developers’ ratings.

“In an environment where many developers are unable to access the capital market for fundraising, a developer has to fund these buybacks with other sources of liquidity or internal cash," he said. "But even if developers do buybacks, the fundamental question remains as to whether a developer has the liquidity to repay maturities and interests that are due in the next few months.”

A report from CreditSights called the ups and downs of the developers' bonds "a vicious cycle".

"Fear continues to grip the China property sector, with continued headlines of another liquidity crunch or developer tumbling into distress," said the report.

A China DCM banker said the market is waiting for the government to loosen its grip on developers' cash, allowing them freer access to project proceeds to repay debts.

"They cannot expect even good companies to survive if they are not allowed access to their own cash," said the banker.

The policy loosening may soon become reality. On January 19, Reuters, citing four people with knowledge of the matter, reported that the Chinese government is drafting nationwide rules to make it easier for developers to access pre-sale funds held in escrow accounts, and said it aims to roll out the new rules as early as the end of January in a push to prevent a wider crisis.

The new rules would help developers meet debt obligations, pay suppliers, and finance operations by letting them use the funds in escrow that are currently controlled by the municipal governments with no central oversight, according to Reuters.