The failure by Chinese property developer Kaisa Group to make an interest payment on a $500m (€442m) bond has undermined confidence in the company and heightened liquidity risks for Chinese property developers.
Kaisa’s financial deterioration since early December 2014 shines a harsh light on the risks facing the sector, and could imperil developers’ near-term access to reasonably-priced funding in the important offshore dollar-bond market, according to Moody’s Investors Service.
The fallout continued yesterday when Kaisa revealed that its chief executive Jin Zhigang had resigned – 48 hours after the developer had agreed to sell assets to rival company Sunac. Investors had hoped Sunac would inject capital into Kaisa itself.
Kaisa missed a payment due in early January on bond a maturing in 2020. The developer’s financial troubles have undermined investor confidence in the company, which has $2.5bn in offshore bonds outstanding, because the financial distress was unforeseen; before Chinese regulators imposed restrictions on Kaisa’s operations in early December, the company’s fundamental performance was strong and its liquidity position adequate, the rating agency says.
Now concerns have spread to include questions about the financial stability of the sector. At issue are Chinese developers’ offshore funding costs, which are already under upward pressure due to the anticipated rate increases by the US Federal Reserve later this year.
Moody’s vice president and senior analyst Franco Leung says those costs “will likely ri.se further due to the higher risk premium demanded from investors and financiers”.
Offshore markets remain an important funding channel for rated Chinese developers, accounting for an estimated 30% to 35% of their total debt, according to Moody’s. By mid-January, the spread on such high-yielding notes over Treasuries had expanded to the highest since 2012.
“Chinese developers’ credit quality could worsen if their access to offshore funding tightens materially and risk premiums remain elevated for an extended period,” says Leung.
The mitigating factor – a small amount of offshore bonds mature in 2015 and 2016, reducing the immediate refinancing risk and affording investors time to assess companies’ exposure.
While press reports suggested the Chinese central government is investigating dealings between property company owners and local government officials – and may be arranging for new investors to take over Shenzhen-based Kaisa – Moody’s says, at this juncture, “reasons for the regulatory restrictions remain unclear, further clouding the outlook for the broader sector.”
According to Moody’s, among Chinese developers with bonds maturing over the next 12 months, Glorious Property and Hopson Development “face the highest refinancing risk, due to their weak cash flows from operations and large amount of short-term debt.”
Kaisa has a 30-day grace period to make the interest payment that was due on January 8 in order to avoid a default. But a quick resumption of debt service payments seems unlikely.
In late-January, Kaisa appointed financial adviser Houlihan Lokey to formulate a capital plan that will be agreeable to all its creditors. Kaisa’s bonds lost as much as two-thirds of their value and the company’s debt has remained volatile since the missed payment.
The news that Sunac had agreed to buy four of Kaisa’s projects in Shanghai for $380m dashed hopes that the struggling company would be able to avoid a default.
Regardless of the outcome, investors in US dollar debt of Chinese companies face a new world where the bonds behave in a subordinated, equity-like manner, whereby offshore debtholders might be repaid only after onshore creditors are made whole.