We're Just Learning the True Cost of China's Debt

[Leroy N. Soetoro]

Bill Clinton economics all over again - except in China.

http://www.bloomberg.com/news/articles/2015-04-22/china-wall-of-exported-
junk-developer-debt-falls-on-global-funds

The true cost of the debt that China’s real estate developers peddled to
eager international investors during a five-year property boom is now
becoming clear.

Having found themselves shut out of local bond and loan markets seven
years ago, a band of developers began looking elsewhere for funds. First
an initial public offering, and then a dollar bond sale. It became a well-
trodden path. By 2010, a core group of four -- Kaisa Group Holdings Ltd.,
Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious
Property Holdings Ltd. -- raised a total of $5.6 billion. On Monday, Kaisa
buckled under $10.5 billion of debt and defaulted.

China’s home builders became the single biggest source of dollar junk debt
in Asia amid government measures to prevent a property bubble. Developers
already funneled $78.8 billion from international equity and bond markets
into an industry that’s grown to account for one third of the world’s
second-biggest economy. Most of the first rush of dollar offerings, in
2010, falls due in the next two years.

“It was an unintended consequence of the Chinese government that property
developers are selling equity and debt to offshore investors,” said Ben
Sy, a Hong Kong-based managing director in JPMorgan Chase & Co.’s private
banking division. “There happened to be huge demand from international
investors in the past few years driven by the intense search for yield.”

High Yields

Kaisa was the first to debut in the dollar note market in 2010, selling
$650 million of five-year bonds that April. The securities paid a 13.5
percent coupon, more than twice the 6.3 percent average yield for Bank of
America Merrill Lynch’s U.S. Real Estate index at the time.

The Shenzhen-based developer was among nine real estate companies that
raised $4 billion selling offshore bonds that year, a record at the time
and fourfold the previous high. Six of the nine had listed their shares on
the Hong Kong stock exchange in the previous 24 months.

Chinese developers’ move into the international capital markets started in
earnest in 2007. From January to December, as the rest of the world slid
deeper into recession, homebuilders raised $7.2 billion. Since 2008,
another $11.5 billion has been raised via IPOs in Hong Kong.

Investor interest was, for the main part, strong. The retail portion of
Glorious’s IPO was 51.4 times oversubscribed. Fantasia received orders
from individual investors for 160 times the number of the shares it was
selling, triggering a claw back mechanism that allowed it to allocate more
stock. The retail component of Renhe’s share sale was undersubscribed with
investors only applying for 7.25 percent of the shares offered to them,
leaving institutional investors to take up the slack.

Borrowed Money

The shift offshore was precipitated to a large degree by happenings within
China. In July 2008, the China Banking Regulatory Commission had issued
circular 214 banning the use of borrowed money to buy land in an effort to
stem rising property prices. The year prior, the China Securities
Regulatory Commission had begun turning down IPO and bond issue requests
for the same reason.

Having tapped equity investors, most developers followed up with a dollar
bond sale.

Developers weren’t “allowed to pay for land purchases with borrowed money
from PRC banks,” said Cheong Yin Chin, a Singapore-based analyst at
independent research firm CreditSights Inc. “They raised money offshore,
the proceeds were remitted to China as shareholders’ equity to the onshore
subsidiaries, so it becomes a form of equity and you can use equity to buy
land.”

Maturing Debt

2010’s roll call included Renhe, which raised $900 million via two dollar
bonds, Kaisa, Glorious with $300 million and Fantasia with $120 million.

The first of Renhe’s notes, a $300 million issue, comes due in May. The
$78.7 million of notes still outstanding, sold at 99.08 cents on the
dollar, are trading at 95.2 cents. Renhe had 884.5 million yuan ($143
million) of cash on its balance sheet as at the end of December.

Officials in Renhe’s investor relations department didn’t immediately
reply to an e-mail seeking comment. An earlier telephone call was answered
by a person who declined to be identified and who requested an e-mail.

Glorious, which was downgraded by Moody’s Investors Service by two levels
to Ca on Monday, one score above default, has its $300 million of bonds
maturing in October. It had cash and cash equivalents, including
restricted cash, equivalent to about $226 million as at the end of 2014,
its financial accounts show. Auditor PricewaterhouseCoopers LLP issued a
disclaimer on April 15 that said they have doubts the company can prepare
its results on a going-concern basis.

More Defaults

“Given that most of Glorious’s debt is secured, we believe the recovery
prospects for offshore bondholders are low and are reflected in its Ca
senior unsecured rating,” Gerwin Ho, a Moody’s senior analyst, said.

Doris Chung, a Glorious investor relations official, didn’t immediately
reply to an e-mail and telephone call seeking comment. Fantasia media
relations official Zheng Jingya said the company can pay its offshore
debt.

Kaisa, which failed to pay $52 million of interest on two of its dollar
bonds after a 30-day grace period expired over the weekend, has said that
in a liquidation, overseas creditors may get as little as 2.4 percent of
their money back.

Standard & Poor’s said in a report last week that the earnings and
profitability of some Chinese property developers may deteriorate further
in 2015, and more defaults can’t be ruled out.

Record Sales

Still, it’s not as if the investors who bought developers’ debt have all
had a bad run. Kaisa 2018 notes, now trading at 57.4 cents on the dollar,
were as high as 104.7 cents on the dollar in August 2014. Debentures of
Country Garden Holdings Co. sold at 99.05 cents on the dollar in August
2010 with a 10.5 percent coupon are at 102 cents.

Investors’ insatiable demand for yield also helped fuel sales. Since 2011,
offshore bond sales have increased consistently, peaking last year when
developers sold $15.7 billion of debt, bringing the total outstanding
amount to $41 billion. That’s 30 percent of all junk-rated debt in Asia,
according to Clement Chong, a senior credit analyst at NN Investment
Partners BV, which had 186 billion euros ($199 billion) under management
as of Dec. 31.

Creditor Rights

“Issuances from Chinese property companies will continue to dominate U.S.
dollar bond supply in the Asian high-yield market given the large
investment needs of this sector coupled with the funding limitations
onshore,” Chong said. “Whilst the government has relaxed onshore funding
restrictions for the sector, to date, only a small number of larger
property companies have been able to tap the onshore capital markets.”

Chong said international investors should understand their rights as
creditors in the event of default. “In almost all cases, onshore creditors
will get their claims to assets first before offshore creditors, so the
position of offshore creditors is deeply subordinated,” he said.

Since Kaisa’s troubles unspooled, developer bond sales have slowed. Dollar
offerings totaled $3.5 billion in the first quarter, half the amount sold
in the same period of 2014. Of the seven bonds sold so far this year, only
two -- from Evergrande Real Estate Group Ltd. and Times Property Holdings
Ltd. -- are rated single B, showing investor appetite for lower-rated junk
debt from the sector remains weak.

The yield on Renhe’s CCC rated bonds due next month meanwhile has soared
24 percentage points in the past two days. Yields on Agile Property
Holdings Ltd.’s perpetual notes rose 3 percentage points in five weeks
late last year after its chairman Chen Zhuo Lin was temporarily arrested.

“I think the recent defaults only reflect the risks that have always been
there and highlight why investors should demand higher yields in the
space,” said Benjamin Cryer, a Singapore-based portfolio manager for the
Franklin Asia Credit Fund of Franklin Templeton Investments, a unit of
Franklin Resources Inc. “Given the amount of leverage in some of these
companies, combined with consistently negative free cash flows, a certain
level of defaults should be expected.”




--
Barack Obama, reelected by the dumbest voters in the history of the United
States of America.

Eric Holder, racist black murdering United States Attorney General, still
has his job.

Nancy Pelosi, Democrat criminal, accessory before and after the fact to
improper vetting of Barry Soetoro aka Barack Hussein Obama, a confirmed
felon using SSAN 042-68-4425, belonging to a dead man.

Obama ignored the brutal killing of an American diplomat in Benghazi, then
relieved American military officers who attempted to prevent said murder
in order to cover up his own ineptitude.

Obama continues his goal of disarming America while ObamaCare increases
insurance premiums 300% and leaves millions without health care.

Obama backed the Muslim Brotherhood in Egypt prior to their removal for
failing to represent the people and constitutional violations.

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[jim]

Leroy N. Soetoro wrote:

> China’s home builders became the single biggest source of dollar junk debt
> in Asia amid government measures to prevent a property bubble. Developers
> already funneled $78.8 billion from international equity and bond markets
> into an industry that’s grown to account for one third of the world’s
> second-biggest economy. Most of the first rush of dollar offerings, in
> 2010, falls due in the next two years.
>
> “It was an unintended consequence of the Chinese government that property
> developers are selling equity and debt to offshore investors,” said Ben
> Sy, a Hong Kong-based managing director in JPMorgan Chase & Co.’s private
> banking division. “There happened to be huge demand from international
> investors in the past few years driven by the intense search for yield.”

Sounds like the same stupid investors first financed
the US housing bubble and then tried to move
on and do the same thing in China.

The lesson that should have been learned from the US housing
bubble is that its a huge mistake to to have the nation's
housing financed by private investors. Privately
financed mortgages accounted for almost all the bad
loans in the US housing bubble.
https://www.economy.com/mark-zandi/documents/2013-06-26-Resurrection-of-RMBS.pdf


Wall Street is very much interested in financing
residential housing because there is a huge amount of
money that can be siphoned off from home owners whenever
private investors provide the financing.