Chinese Developers Get State Help to Tap Bond Market

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Country Garden, Longfor and Midea Real Estate are making use of credit derivatives to help get new deals done

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The initiative follows other measures, including a cut by the central bank in mortgage rates for first-time home buyers, and easing in different regions for things like down payments and home-purchasing restrictions.

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Still, investors and analysts warn it will take time to stabilize the property market, with sentiment weak among prospective home buyers and financial distress widespread among developers. Meanwhile, stringent lockdowns in many cities have dealt a further blow to consumer confidence and disrupted new apartment sales.

Country Garden Holdings Co.

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, Longfor Group Holdings Ltd. and Midea Real Estate Holding Ltd. are selling domestic bonds in yuan this week, prospectuses show. The three developers, which aren’t state-backed, are aiming to raise a total of up to 2 billion yuan, equivalent to $296 million.

Private developers have only sold 11.8 billion yuan of onshore bonds so far this year, Wind data shows, compared with 190 billion yuan issued by their state-owned peers.

The deals’ underwriters and China Securities Finance Corp. will also sell credit derivatives to accompany some of the debt, according to deal messages viewed by Businesshala, and people familiar with the Longfor bond sale.

The Country Garden and Midea deals will be accompanied by credit-default swaps, the messages showed, while the Longfor deal could either make use of such a swap or another similar instrument known as a credit risk mitigation warrant, the people said.

Buyers of those swaps and warrants will pay an extra premium to reduce their credit risk, meaning their investment ultimately resembles a safer but lower-yielding government bond. Current prices in China’s credit markets mean they are still set to earn a higher interest rate than on a risk-free sovereign bond, despite using credit-default swaps as a form of insurance.

The default risk will instead be borne by the underwriters and CSFC, which is owned by China’s major exchanges and one of the country’s clearinghouses.

Country Garden confirmed that default-swap contracts would be written alongside its bond deal. The other two developers didn’t respond to requests for comment.

Financially weaker developers are unlikely to be able to do similar deals, analysts said. Brokers would be reluctant to bear the increased default risk, even if it meant collecting higher swap premiums, and Chinese regulators limit institutions’ overall CDS exposures.

The system will work for developers with relatively strong fundamentals whose existing bonds aren’t trading too cheaply, said Yao Yu, founder of YY Rating, an independent Chinese credit-research firm. “As people say, it is easy to convince people to push the boat with the current, but very hard to convince them to do so against it,” Mr. Yao said.

“This is a top-down thing, facilitated by regulators,” he said, adding that securities firms treated it as a political task.

Credit-default swaps have been used internationally for decades but were only introduced in China in 2016 by the regulator of the interbank bond market, one of China’s main debt markets. They became more widely used in 2018 when onshore defaults by privately owned enterprises started to pick up.

The credit warrants are similar to default swaps, but unlike those instruments they are publicly traded, and only insure against an issuer failing to meet its obligations for a single specified bond.

Recent data has underscored the scale of the challenge facing China’s property sector. Government statistics released Monday showed new-home starts and home sales by value in April fell 44% and 47%, respectively, from a year earlier, while mortgage demand also plunged.
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Even the comparatively sedate official data is flashing a warning signal, with a monthly measure showing new-home prices had fallen on an annual basis for the first time in more than six years.

An eventual market recovery wouldn’t be of that much help to developers with imminent funding needs, said Kaven Tsang, an analyst at the credit-ratings firm Moody’s Investors Service. “The market is definitely going to be polarized, with the stronger ones taking over more market share from the weaker ones,” Mr. Tsang said.

Write to Rebecca Feng at [email protected]


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