High-Yield Window Open for Chinese Developers?

By Isabella Steger

A successful high-yield bond issue from mid-sized Guangzhou R&F Properties Co. could signal that Chinese developers can once again tap bond markets to plug their financing needs.

On Wednesday, Guangzhou R&F Properties increased the tap size of its April 2016 dollar bond from around $200 million to $238 million, with the yield expected to be tighter than its initial guidance of 12.375%, according to a term sheet seen by Dow Jones Newswires. The deal has attracted $2.5 billion of orders from investors ? and that?s after the mid-sized developer issued a profit warning in July.

It?s a sign that the window for Chinese developers to issue debt may be open again after a lull, as the country?s property prices begin an uptick and alarming headlines from the eurozone region decrease.

Chinese developers started looking to bond markets for funds again around March this year. Agile Property Holdings Ltd. sold a $700 million five-year bond priced at 9.875% that month, with the bond nine times oversubscribed. KWG Property Holding also sold $400 million worth of five-year bonds priced at 13.5%, but issuance has taken a breather since.

Guangzhou R&F?s in-demand bond may provide some relief to the cash-strapped real estate sector in China, which has been seeing margins squeezed due to government policies to dampen property prices, including curbs on lending and limits on home purchases. Chinese banks have also been turning off their taps in a bid to rein in credit growth, forcing developers to turn to other sources for funds, such as trust companies. In response, developers have been slashing prices to alleviate their cashflow problems.

In the first-half of this year, Deutsche Bank says average borrowing costs for Chinese developers rose by ?remarkable? levels of about 100 basis points compared with the same period a year before, as funding conditions continue to worsen for these companies.

Deutsche Bank says those who have turned to trust financing and other high-yield debt, typically non-state-owned firms, will face more pressure to get financing going forward. State-owned firms continue to get preferential financing treatment, with China Overseas Land & Investment Ltd., for example, seeing its borrowing costs widen by only about 30 basis points to 3.6% in the first half of 2012 on-year.

?In our view, this significant advantage in terms of cost of financing for the larger state-owned developers?should allow them to grow at a faster pace in the longer term, especially given the central government?s ongoing property market tightening,? wrote Deutsche Bank.

If the debt-issuance window stays open, property companies can look to Guangzhou R&F Properties? experience and trust that there are enough yield-hungry investors out there for their debt.

Source: http://blogs.wsj.com/deals/2012/08/23/high-yield-window-open-for-chinese-developers/?mod=WSJBlog

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