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China property bond risk rises to record

Analysts cite moves to cool market, curb loans to developers to fund expansion

(SINGAPORE) The risk of property developers in China defaulting on their debt rose to a record, according to traders of credit-default swaps.

The cost to protect bonds sold by Agile Property Holdings Ltd, Shimao Property Holdings Ltd and Hopson Development Holdings Ltd rose by as much as 80 basis points, the most on record, outpacing an 18 basis point increase in the Markit iTraxx Asia Ex-Japan Series 8 Index of 20 high-risk, high-yield borrowers, according to BNP Paribas SA.

Intensifying efforts by the government to cool the property market and aggressive borrowings by Chinese builders to fund their expansion sent the risk they may default on their debt to record highs, according to Mark Lo, a Hong Kong-based credit analyst with BNP Paribas.

‘I am bearish on this sector,’ said Mr Lo. ‘There is downside risk and limited upside for bond investors.’

Shimao and Agile, contributing to a 29 per cent surge in property investments in the 12 months ended August, may deplete cash reserves and depend more on sales to service debt, analysts at Moody’s Investors Service said in a Nov 6 report.

The contracts tied to the debt of Shimao, Hopson and Agile traded at 560 basis points, 680 basis points, and 650 basis points respectively at 5.13 pm in Hong Kong yesterday.

Credit-default swaps on Shanghai-based Greentown China Holdings Ltd debt rose 80 basis points to a record 800 basis points, according to BNP Paribas.

The government increased minimum down payments on apartments to 40 per cent from 30 per cent in September and ordered banks to raise reserves by the most in four years on Dec 8. Lenders must put aside 14.5 per cent of deposits as reserves, starting Dec 25, up from 13.5 per cent.

Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company’s ability to repay debt. They were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default.

Potential issuance from Chinese real-estate companies with at least a BB rating may be US$15 billion, more than the current outstanding market of less than US$4 billion, said Todd Schubert, a credit analyst with Deutsche Bank AG in a Dec 7 report.

The rising borrowing costs prompted Country Garden Holdings, China’s most profitable developer, to shelve its US $1.5 billion bond sale. Investors snubbed yields of up to 10 per cent offered by the company in November.


Source: Bloomberg (Business Times 10 Jan 08)


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