Country Garden, Longfor, Midea Selling $295M in Bonds to Prop Up Industry

Mainland developers Country Garden Holdings, Longfor Group and Midea Real Estate Holdings announced plans Monday to issue domestic bonds, with the combined RMB 2 billion ($295.4 million) barrage of local financing seen by analysts as a government-sponsored attempt to stimulate lending to the property sector.

The companies, three of the largest builders in the country, unveiled the plans in separate filings to the Hong Kong stock exchange amid reports that the mainland government asked them to issue the notes to help improve sentiment in the market, especially after other Chinese property companies defaulted on offshore bonds, shaking the confidence of both investors and lenders.

Country Garden, through its Country Garden Real Estate Group subsidiary, said it will issue RMB 500 million of corporate bonds “in the near future”. Details including the coupon rate and maturation of the bonds were not provided in the HKEX announcement that was attached to the company’s statement on the unusual price movement of its shares.

As of 16 May, Country Garden said the issuance is still at the planning stage and may not even proceed. However, according to the South China Morning Post, there exist term sheets for the offering and these showed that the coupon rate for the three-year bonds will be between 4.5 percent and 5 percent.

Sweeteners Attached

Meanwhile, Longfor announced that its indirect subsidiary, Chongqing Longhu Development, will on 18 launch a RMB 500 million offering of six-year bonds. The notes comprise the second tranche of the issuer’s 2022 domestic corporate bonds and will be priced between 3 percent and 4 percent, with the final coupon rate to be determined on 17 May.

The largest offering from the trio is that of Midea Real Estate Holdings’ Midea Real Estate Group subsidiary, which plans to issue up to RMB 1 billion of four-year corporate bonds, according to a filing to the Hong Kong exchange. The bonds will be drawn from the issuer’s RMB 6.71 billion debt shelf that the China Securities Regulatory Commission approved on 30 December 2020. According to the SCMP, Midea’s property unit will issue up to RMB 1.44 billion, with interest between 4.1 percent and 4.9 percent.

Two unnamed sources with knowledge of the matter told Reuters that along with the bonds, the companies will issue credit default swaps or credit risk mitigation warrants to sweeten the offering.

Banks to the Rescue

In support of the latest issuance, the government has asked Chinese banks to purchase the notes issued by the three developers, Reuters reported, citing financial intelligence provider REDD.

The government has incorporated banks and other lenders in its plan to revitalise the sector. In April, it allowed lenders to ease restrictions on some loans to distressed developers, and in September 2021, it urged financial institutions to work together with local governments in supporting property companies.

On 15 May, Beijing also allowed banks to reduce by 20 basis points the lower limits of interest rates for potential new homeowners, hoping that the move will revive the market.

Limited Options for Developers

The planned debt issuances follow admissions from some Chinese developers that they are having difficulty settling outstanding debt amid challenging economic conditions exacerbated by the COVID-19 pandemic. Sales declined for many developers and their access to credit was further limited with the implementation of China’s “three red lines” policy. The default of China Evergrande Group, one of the country’s largest developers, further highlighted the debt problems in the sector.

As more Chinese developers defaulted on their loans and other financial obligations, opinions of the market became more bleak. The credit ratings of property companies were also hit as the liquidity crisis threatened to spill over to more developers. In 2021, credit rating agencies Moody’s, Fitch and S&P downgraded Chinese developers 43, 54 and 30 times, respectively, compared with six, 12 and 11 the year before, according to London’s Financial Times.

Sunac China, the mainland’s third-largest developer by contracted sales, acknowledged in 2021 that the downgrade further narrowed its already limited access to funds. The company, which failed to settle $29.5 million in interest on $750 million in senior notes ahead of the deadline last 11 May, warned that it may also miss future payments due to its declining sales and amid challenging economic conditions in the country.

Cheng Wee Tan, a senior equity analyst at financial services firm Morningstar, said developers may opt for debt restructuring. He said Chinese property companies have limited options to aid with their recovery, including teaming up with asset management companies or state-owned enterprises.