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Shimao to shun debt markets for up to a year

(HONG KONG) Shimao Property Holdings Ltd, a developer owned by Chinese billionaire Hui Wing Mau, said it will shun debt markets for up to a year as yields on its dollar bonds rose to a record.

The Hong Kong-listed company doesn’t plan to sell foreign- currency bonds or convertible debt in the next six to 12 months, it said in an e-mail to Bloomberg News.

‘We have strong sales proceeds from pre-sales and we have a big portfolio of investment properties that can help us raise bank loans in China more easily than other pure residential property developers,’ Shimao said in the e-mail.

Investors are asking for record high risk premiums to hold Chinese real estate developers’ bonds as concern that the US economy may enter into recession drives asset managers away from high-risk, high yield debt.

Country Garden Holdings Co, China’s most profitable developer, earlier this month scrapped a plan to raise US$1 billion from its first overseas bond sale.

‘There was quite bit of speculation that other Chinese developers, including Shimao, were thinking about selling dollar bonds,’ said Lawrence Koo, a Hong Kong-based director of credit trading at hedge fund Tribridge Investment Partners Ltd. ‘It would take a bit of pressure off Shimao’s existing bonds if they announce there is no such plan, but it won’t help too much unless other developers also decide not to sell debt.’

The spread, or extra yield, investors demand to hold Shimao’s US$350 million of 8 per cent bonds maturing in 2016 rather than Treasuries widened to a record 590 basis points at 3:53pm in Hong Kong, according to Merrill Lynch & Co prices. A basis point is 0.01 percentage point.

Credit-default swaps on Shimao’s debt were unchanged at 480 basis points, according to Barclays Capital.

That means it costs US$480,000 a year to protect US$10 million of Shimao’s bonds from default for five years.

The debt is rated BB+, one level below investment grade, by Standard & Poor’s (S&P).

The developer plans to increase its land bank to as much as 35 million square metres at the end of 2008 from 21 million square metres, according to the e-mail.

It said it plans to fund the estimated 10 billion yuan (S$2 billion) cost of buying land from planned property sales of 17 billion yuan next year.

Many Chinese real estate developers will be forced to seek other funding avenues for their rapid expansion until credit market conditions stabilise, S&P said in a report on Nov 15.

Small developers with limited capital are likely to find the market conditions too tough to survive while bigger companies will become more reliant on internally generated cash and bank loans until they can tap debt markets, the rating assessor said.

‘The increasing ambition of many developers to aggressively grow, both in size and geographic coverage, creates high execution risks,’ according to S&P.

‘If growth is heavily debt-funded, the financial health of developers will come under pressure.’


Source: Bloomberg (Business Times 23 Nov 07)

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