Chinese Builders Rally on Plans for State-Guaranteed Bond Deals
Bloomberg News
Tue, August 16, 2022
(Bloomberg) -- China’s embattled developers surged in the stock and bond markets Tuesday on news that authorities are planning to help some raise fresh financing, adding to signs of official support for an industry grappling with a debt crisis and slumping home sales.
Notes from Country Garden Holdings Co., CIFI Holdings Group Co. and Longfor Group Holdings Ltd. soared at least 11 cents on the dollar Tuesday, according to Bloomberg-compiled prices, set for the biggest gains since March. Their shares surged more than 9% in Hong Kong and a Bloomberg Intelligence gauge of the sector gained 2.4%, the most in three weeks.
Chinese authorities have told several property developers that state-owned credit support provider China Bond Insurance Co. will give full guarantees for some of their upcoming onshore bond offerings, according to people familiar with the matter. The first batch of private developers to be included in the plan include Longfor, Seazen Group Ltd., CIFI, Country Garden and Gemdale Corp., the people said, asking not to be identified because the matter is private.
Investors applauded the possibility of more help for the industry, even though it wouldn’t be the large-scale support that many have clamored for as officials signal that homeowners are the priority of property-sector stabilization efforts, not builders. Developers are suffering from a liquidity crunch, sparked by government efforts to curb leverage, that’s caused record levels of defaults and prompted concern about debt repayment from even the largest companies.
“The mooted state-supported onshore bond issuances are undoubtedly a positive for these developers and the broader sector and signal the government’s continued willingness to evolve policy,” said Owen Gallimore, head of APAC credit analysis at Deutsche Bank AG. “But we have had similar regulatory efforts over the past year and the market will judge this on the execution and scale of the supported bond issuance.”
In response to China’s deepening economic slowdown, The People’s Bank of China unexpectedly cut interest rates Monday. That move has done little to allay concerns, with economists and state media calling for additional stimulus.
China Bond Insurance will provide unconditional and irrevocable guarantees in full amount for the batch of bond sales in the interbank market by these developers, according to the people familiar with the matter. Regulators will likely arrange policy banks and state-owned lenders to subscribe to these bonds, to make sure they can be fully sold, the people said. Proceeds raised will be more flexibly used, including to be used offshore.
“The government may have realized it is easier and cheaper to support property developers by helping them issuing bonds than to deal with their unfinished projects after they default in order to preserve social stability,” said Bloomberg Intelligence analyst Dan Wang. “Yuan bonds of some of these higher-quality developers, especially Gemdale and Longfor, have been dropping in the past few weeks -- which signal risks that they could lose access to the onshore bond market.”
A Longfor unit plans to issue 1 billion to 1.7 billion yuan ($147 million to $250 million) of medium-term notes in China’s interbank market on Aug. 24, according to people familiar with the matter. The funds will be used for purposes including project construction and offshore bond repayment and buybacks.
Longfor said regulators plan to offer positive support, and the detailed plan is being discussed. Country Garden, Seazen, CIFI and Sino-Ocean didn’t immediately respond to requests for comments. Gemdale declined to comment. Calls to the front desk of China Bond Insurance went answered. There was also no immediate response from the National Association of Financial Market Institutional Investors, China’s interbank market watchdog, to requests for comment.
Firms including Country Garden and Longfor announced onshore bond offerings in May as regulators planned to help some builders sell debt at a time issuance was at multiyear lows. Still, their dollar notes fell to record lows last month as worries about the debt-laden property sector mounted.
That earlier debt-sales effort “was relatively small to make a difference, said Agnes Wong, head of APAC credit strategy at BNP Paribas. Still, the latest reports are an “indication that the policy risk has seen its bottom and we are getting closer to a tipping point.”
Onshore, the credit market is flooded with cheap money, but a growing number of weaker borrowers are struggling to obtain it.
“We believe investors will likely remain skeptical until further proof that these few private developers will enjoy continual funding support from government,” JPMorgan analysts including Karl Chan wrote in a research note.
The bursting housing bubble has erased about $90 billion of equity and dollar-bond market value this year.
Reuters and REDD reported on the bond guarantee plans earlier.
©2022 Bloomberg L.P.
China supports several private developers with bond guarantee -sources
HONG KONG (Reuters) - Chinese regulators have instructed state-owned China Bond Insurance Co. Ltd. to provide guarantees for onshore bond issuance by a few private property developers including Longfor Group and CIFI Holdings, according to four sources with knowledge of the matter.
The support from the state comes amid mounting concerns that a deepening debt crisis and defaults in the sector could impact property developers that have been regarded as financially sound.
Property developers' shares surged on Tuesday following the news, with Longfor, CIFI and top developer Country Garden all jumping over 15%. The Hang Seng Mainland Properties Index firmed 9.2%, versus a 0.6% gain in the main Hang Seng Index.
China Bond Insurance Co, which provides financial guarantee services, will provide "full amount, unconditional and irrevocable joint liability guarantee" to these medium-term notes, the sources said. The guarantee provides more protection than credit risk management tools, they said.
Two of the sources said Longfor has already sold 3-year and 5-year medium term notes totalling up to 1.5 billion yuan with a guarantee from China Bond Insurance Co.
Financial information provider REDD first reported the plan to provide a guarantee for issuers on Monday evening. Its report said policymakers had drawn up a list of half a dozen developers regarded as financially stronger, including Gemdale Corporation and Country Garden Holdings, whose bond issues would receive guarantees.
REDD also said policymakers were considering asking state investors to subscribe for new notes issued by developers. The issuers would have to provide collateral for the state guarantee but the use of proceeds would be flexible, it said.
CIFI, Country Garden and Longfor declined to comment. China Bond Insurance Co. Ltd and Gemdale were unavailable for comment.
Reuters reported authorities had also helped some financially sound developers to boost liquidity in May, when it encouraged Country Garden, Longfor and Midea Real Estate to issue bonds, while also requesting securities firms to provide credit risk management tools for potential investors in the bonds.
(Reporting by Kevin Huang and Shuyan Wang in Beijing, Clare Jim in Hong Kong; Editing by Simon Cameron-Moore)
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