Tags: bonds | corporates | housing | china | asia

China Developer Bonds Top Asia Debt

Sunday, 17 October 2010 12:36 PM

Chinese property bonds are beating company dollar debt across Asia this month after home values unexpectedly rose in September and Standard & Poor’s said developers can withstand price drops of as much as 10 percent.

Evergrande Real Estate Group Ltd.’s $1.35 billion of 13 percent bonds due in January 2015 returned 4.2 percent, the most among the top 50 companies in Bank of America Merrill Lynch’s Asian Dollar Corporate index. Agile Property Holdings Ltd.’s $650 million of 8.875 percent notes due April 2017 delivered 2.8 percent and Country Garden Holdings Co.’s similar-maturity 11.25 percent notes returned 2.1 percent, compared with a 1 percent regional average, the index and data compiled by Bloomberg show.

Home values climbed 0.5 percent last month from August and 9.1 percent from a year earlier, beating economists’ estimates and increasing for the first month since May, even as Premier Wen Jiabao and policy makers in the world’s fastest-growing major economy added to measures aimed at cooling the property market. Developers’ bonds have rallied since May after real estate prices jumped the most on record in April and China posted 10.3 percent second-quarter economic growth.

“It’s a cheap sector,” Viktor Hjort, a Morgan Stanley credit strategist, said in a telephone interview from Hong Kong. “It’s misguided to focus on policy alone in order to try and gauge where this sector is going.”

Faced with near-zero interest rates in Japan and the U.S., the extra yield investors demand to own Guangdong-based Country Garden’s 11.25 percent bonds instead of Treasuries fell 433 basis points, or 4.33 percentage points, since May to 759 basis points, according to ING Groep NV. The spread on Los Angeles- based KB Home’s similar-maturity 9.1 percent notes was last at 592, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Country Garden has a Ba2 rating from Moody’s Investors Service, the risk assessor’s second-highest speculative grade. KB Home, which focuses on first-time buyers in the U.S., is ranked two steps lower at B1.

S&P said on Oct. 11 that China’s property companies can withstand price declines of as much as 10 percent in major cities over the next 12 months because they have “adequate liquidity and have already locked in the majority of their revenue for 2010.” Nomura Holdings Inc. predicts drops of as much as 10 percent by the end of next year as cities including Shanghai introduce their own measures to cool increases.

Double-Digit Declines

“The authorities may not see the property curbs as successful until prices fall by double-digits from a year earlier, so the current restrictions may last into next year,” Zhang Zhiwei, a Hong Kong-based economist at China International Capital Corp., said before the September housing data were published on Oct. 15. “Cash-rich developers may be able to resist cutting prices for a while.”

The International Monetary Fund forecast on Oct. 6 that China’s gross domestic product will grow 10.5 percent this year, outpacing expansion of 2.6 percent in the U.S. China’s foreign- exchange reserves rose to a record $2.65 trillion on Sept. 30, the central bank reported last week. Exports climbed 25.1 percent last month from a year earlier, leading to a trade surplus of $16.9 billion, according to the customs bureau.

The yield on China’s benchmark local currency 10-year bond slid 2 basis points this month to 3.29 percent. Similar-maturity bonds yield 8.06 percent in India, 7.70 percent in Russia and 11.77 percent in Brazil.

Yuan Forwards

Twelve-month non-deliverable yuan forwards advanced 3.7 percent in the past month to 6.4280 per dollar in Hong Kong, reflecting bets for a gain of 3.3 percent from the onshore spot rate of 6.6412. The currency strengthened 0.4 percent in the five days ended Oct. 15, advancing for a sixth week.

Chinese government bond risk is falling, according to traders of credit-default swaps. Five-year contracts on the nation’s debt declined 28 percent in the past month, the biggest drop among more than 80 nations, and closed at 57 basis points on Oct. 15, according to data compiled by CMA and Bloomberg.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

Chinese developers raised $7.8 billion from bonds since January, paying coupons as high as 14 percent and an average 10.8 percent, data compiled by Bloomberg show. U.S. real estate company bonds yield an average 4.04 percent and returned 0.93 percent this month, according to Bank of America Merrill Lynch’s U.S. Real Estate Corporate Index.

Falling prices in North America mean almost one quarter of home sales in the second quarter involved properties in some stage of mortgage distress, RealtyTrac Inc. said on Oct. 1. In August, lenders took possession of a record 95,364 homes and issued foreclosure filings to 338,836 homeowners, or one out of every 381 U.S. households, according to the Irvine, California based data-provider.

In China “the measures being implemented by the government don’t seem to have any effect on the bond prices,” said Chew May Tan, who helps oversee $1.5 billion of Asia-Pacific fixed- income assets at Aberdeen Asset Management Asia Ltd. in Singapore. “Investors are in a search for yield mode so there’s a lot of demand for these bonds.”

Agile’s 8.875 percent bonds soared to 106 cents on the dollar on Oct. 15 from a low of 86 cents on May 25, the same day China’s Ministry of Housing and Urban-Rural Development warned home price increases could spread to multiple regions. Country Garden’s 11.25 percent notes rose to a record 110.25 cents from a low of 87 cents on May 25.

China’s banks extended 595.5 billion yuan of new loans last month, for an increase in the first nine months of 6.3 trillion yuan, according to the People’s Bank of China. A record 9.59 trillion yuan of new lending last year prompted regulators to impose a 7.5 trillion yuan annual limit on banks this year.

“Credit growth has always been the best leading indicator for this sector because these are levered companies and their clients use leverage in order to transact,” said Morgan Stanley’s Hjort. “Between now and the end of the year China property bonds will continue to outperform.”

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Chinese property bonds are beating company dollar debt across Asia this month after home values unexpectedly rose in September and Standard Poor s said developers can withstand price drops of as much as 10 percent.Evergrande Real Estate Group Ltd. s $1.35 billion of 13...
Sunday, 17 October 2010 12:36 PM
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