Hi-Yield China Property Bonds

Hi-Yield China Property Bonds - going crazy


Yields Too high to be good?


RISKS HANG OVER SURGE in High-Yield Bonds - SCMP


Mainland developers dominate this year's issuance, more than half of which is unrated


There's talk of "privately placed property bonds that pay total annual yields to investors in the realm of 20 to 25 per cent"


I cannot see why any viable business would need to offer such extraordinary returns, and so this is a warning sign for me. And there are many others:


+ Mainland bond issuance has amounted to almost $24 Billion, year to date - 3X the previous record in 20009


+ Over half of these were unrated


+ There's a concentration risk, with 40% of the high yield bonds in the JP Morgan Asia Credit No-Investment Grade Corporate Index, being property sector bonds


+ Give the concentration, the whole high yield sector is vulnerable in a cyclical downturn, which is inevitable in the property sector

I had a brief look a few years ago.


A very mixed bag. Some of the issuers have very solid balance sheets that should be able to withstand a major property downturn quite easily while others are carrying higher gearing levels and are more vulnerable.


If I had to speculate, I would be more worried about the impact of a liqudity crunch when an issue needs to be rolled over than a property crash.


I put a little money into HK:3139 for exposure to RMB bonds. I'm giving up a bit of yield but getting plenty of diversification.

What looks good now, may not stay good...


"The Chinese property developers are experiencing a record year in terms of sales. Typically, the profit margin for property firms in in excess of 30%. If you pay a 10 pct coupon to finance a 30 pct return, it makes sense."


But property is highly cyclical, and firms got into trouble in the last downturn, and needed to be rescued.


Such as:


+ Neo-China Land, which was rescued by Shanghai Industrial injecting HK$2.75 Billion in Jan.2010 to rescue it


+ SPG Land (high end homes in Yangtze River Delta), was rescued by Greenland Holdings with a HK$3 Billion cash injection


+ Greentown (based in Hangzhou) got into trouble thanks to "property cooling measures" last year, and was rescued by Wharf Holdings, which paid over HK$5 billion to take control


No doubt, cash-rich HK developers will be alert for opportunities in the months and years to come.


And I think this is worth a thread on AX

The SCMP article makes the point that:


"Private banking clients do not have the tools to make complex pricing calls one new or unrated credits"


- so they may be getting stuffed with low quality credit risks.

Those are some of the reasons why I have gone with a fund that has over 80 issuers in its portfolio (that and the fact that many issues require a minimum investment of RMB1,000,000). If I did buy bonds directly, I would only be interested in the biggest names ... after I had read their balance sheets closely.