State-driven deals underwhelm

IFR Asia 1238 - 28 May 2022 - 03 Jun 2022
7 min read
Emerging Markets, Asia
Pan Yue

Three top-tier Chinese property companies raised a total of Rmb2bn (US$299m) in the onshore bond market in the past two weeks, but the government-driven issuance did little to improve sentiment for the embattled sector.

Longfor Group Holdings, Midea Real Estate and Country Garden Real Estate Group were reportedly chosen by Chinese authorities to issue bonds this month as the borrowers are in good financial standing compared to their mostly beleaguered industry peers. Longfor and Country Garden both raised Rmb500m from their bond sales, while Midea sold a larger Rmb1bn note.

Longfor priced its six-year bonds at par with a coupon rate of 4%, at the higher end of the indicative rate of 3%–4%. Its subsidiary Chongqing Longhu Development was the issuer.

Country Garden's three-year bonds priced at 4.5%, having been marketed at 4.5%–5%. Midea's four-year notes priced at 4.5% as well, and were marketed at 4.1%–4.9%.

Midea said on its official Wechat account that the bonds were 1.36 times subscribed, and the final coupon rate was much lower than the average funding cost for the sector.

However, market participants reckon the success of the onshore deals will have little impact on the broader market feelings about the property sector, since the issuers are among the strongest developers and have good access to funding. Longfor and Country Garden have respective international ratings of Baa2/BBB/BBB and Baa3/BB+/BBB–, and all three are rated Triple A onshore.

Nor did the deals seem to price at lower yields than usual.

"I believe the impact is zero, judging by the price action," said a DCM banker. "The market already knows these are three names that have stronger support from the Chinese authorities because of their sizes and creditworthiness. To save the sector, and indeed the economy overall, things need to open up."

The DCM banker described the sales as bank lending disguised as bonds.

The transactions seemed to be artificially propped up from the beginning. Reuters reported on May 16 that the Chinese authorities had ordered the three companies to sell domestic bonds in order to boost market sentiment. It cited financial intelligence provider REDD, which also reported that the government had asked Chinese banks to buy the bonds.

The deal sizes were also small, as onshore corporate bond issues tend to top Rmb500m. The average size of onshore bond issues by developers in the first quarter was Rmb1.5bn, according to Luther Chai, a senior analyst from CreditSights. Country Garden sold a 6.3% Rmb1bn four-year bond in December and Longfor raised a total of Rmb2.8bn from two tranches one month later.

The recent deals were just a drop in the bucket compared to the US$31bn of offshore debt Chinese developers have maturing or becoming puttable by the end of the year, according to CreditSights.

“There hasn’t been a big impact on the offshore bond prices of Chinese developers so far. The market will likely wait to see if even the weaker names can issue bonds onshore,” said Chai.

A Hong Kong-based investor also believed the impact to be minimal and said he will stay away from the sector. He said that his fund offloaded most of its Chinese property exposure last December, and has moved focus to other emerging markets instead.

Adding security

Unusually, credit support was offered alongside the bonds. Reuters reported that all three bonds were offered with either credit default swaps or credit risk migration warrants, an instrument specific to China. Chinese media reported that developer Cifi Group is also preparing to issue an onshore bond also with similar credit protection soon.

While a writer of CDS pays out if any of an issuer's bonds default, a CRMW applies to only one bond and the instrument is more widely traded than CDS. Both instruments are relatively new to the onshore market.

"It's interesting to see the CDS and CRMW. It means that investors finally have something for hedging," said the Hong Kong-based investor.

China Securities Finance Corp, a state-owned financial services company, and Citic Group's subsidiary China Securities provided credit protection contracts with a tenor of no more than one year for Country Garden's issuance. China Securities Finance and Guotai Junan also offered such instruments for Midea's bonds.

The investor questioned whether any institution would be willing to write such credit protection for weaker names. "The SOEs are concerned about their own financial situation, and may not be willing to bear that risk," he said.

Government support

The recent issues are seen as the latest move by the government to support the property sector. Earlier this year, the government relaxed the "Three Red Lines" – measures of leverage that determine how much new borrowing developers can undertake – to boost liquidity.

More recently on May 15, the People's Bank of China and the China Banking and Insurance Regulatory Commission announced that commercial banks could reduce the lower limit of interest rates on home loans by 20bp for first-time home buyers, based on the corresponding tenor of benchmark Loan Prime Rates. The central bank also lowered the five-year LPR, which is widely used as the benchmark rate for mortgages, by 15bp to 4.45% in May from the previous month's 4.6%.

In addition, Reuters reported in February, citing local media outlet Cailianshe, that a new regulatory framework has been put in place to relax rules around escrow accounts.

Chinese developers are allowed to sell projects before they are completed, but are required to put a certain percentage of the pre-sale money into escrow accounts. After China Evergrande Group's default in the second half of 2021, many city or country-level authorities tightened the rules to require a higher percentage of funds in the escrow account, leaving developers short of cash to finish projects.

"While we expect escrow account supervision to be less strict compared to 2H21, when it was first strictly enforced by the regulators, we do not think there will be an all-out removal of the escrow requirements,” said Chai, who believes the requirement will remain tighter than it was in the first half of 2021.

“Looking ahead, we expect more easing measures to follow given the persistent weak homebuyer sentiment...However, we think that policy easing will likely be piecemeal and at the city level, to cater to the different supply and demand conditions in each city, and to prevent further speculation in the housing market," he said.

Refiled story: fixes typo