[photopress:real_estate_china_garden.jpg,full,alignright]The perceived risk of owning Chinese property developers’ debt rose as a result of a report a record bond offering by Country Garden will drive up borrowing costs.
According to Morgan Stanley Credit-default swaps on the debt of the Shanghai-based Greentown China rose 45 basis points to a record 465 basis points. Morgan Stanley prices also show the cost to protect bonds sold by Agile Property, Shimao Property and Hopson Development from default, rose by as much as 30 basis points.
The cost of the contracts rose as Country Garden, the most profitable mainland Chinese developer, prepares to sell as much as $1.5 billion of bonds, the biggest by a mainland property company.
Country Garden may have to offer higher returns than debt sold by the Shanghai-based Shimao, which has similar credit ratings, to attract investors to the sale.
Eugene Kim, chief investment officer of the Hong Kong-based Tribridge Investment Partners, a hedge fund managing about $200 million including Asian debt, said, ‘Size of debt is a key issue. Although Country Garden is a bigger company, most investors expect it will have to come at a premium to Shimao.’
To understand this you need to know that credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company’s ability to repay debt. They were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default.
Each basis point, or 0.01 percentage point, on a contract protecting $10 million of debt from default for five years adds $1,000 to the annual cost.
Country Garden is raising funds to finance new projects and repay debt as first-half profit more than doubled to RMB1.42 billion, or $190 million, on higher home sales.
The property developer is rated Ba1 by Moody’s Investors Service, one level below investment grade. The debt is rated BBB-, the lowest investment grade, by Standard & Poor’s. Debt rated below Baa3 by Moody’s and BBB- by S&P is considered high-yield and high-risk, or junk. Shimao is rated Baa3 by Moody’s and BB+ by S&P.
Annisa Lee, a credit analyst with Lehman Brothers in Hong Kong said, ‘There is a supply risk with Country Garden planning a $1.5 billion issue. China’s home price increase in September does not suggest prices have stabilized, which could increase the likelihood of more austerity measures by the government.’
The China Securities Journal reported on Oct. 14 the Chinese tax bureau and Finance Ministry may impose a tax on high-end and large property developers, adding four cities to six areas where the tariff is already being levied.
Does this mean the beginning of some sort of slump? General consensus of opinion is that this is is not so as most buyers are first time buyers who are not affected.
Source: China Daily News
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