International debt markets didn’t wait for the rescue of Shenzhen-based Kaisa Group to bring back Chinese developer notes as Shimao Property sold an $800 million seven-year bond on Tuesday night.
The debt issue came just hours before Tianjin’s Sunac Holdings agreed to acquire Kaisa and only a few days before the Shenzhen developer could become the first Chinese developer to default on its offshore bonds.
The heavy demand for Shimao’s bond – it attracted a $6 billion order book within 24 hours – proves that there are still investors interested in high yield debt from China. However, that yield went much higher in order to generate demand, with the Shanghai-based company offering an 8.375% yield on the notes.
By bringing Chinese developer bonds back to the market at a higher price, Shimao may have signalled a period of costlier financing for China’s real estate companies, just as the country struggles to overcome a nearly year-long property slump.
More Expensive Bonds for China’s Developers
While the final price for the bond was tighter than initial price guidance of 8.75, some analysts estimate that the bond’s yield is still more than 87 basis points higher than what Shimao would have had to pay in early December before Kaisa missed an interest payment due on a $500 million bond on January 8th.
Shimao’s offering has expected ratings of Ba3/BB-/BB+, according to an account in FinanceAsia.
Hong Kong-listed Shimao is one of China’s largest developers with significant commercial holdings, including a number of five-star hotels in first-tier cities, as well as a strong track record in the residential sector. The Shanghai-based company last year bought an office building in Sydney for $339 million.
Impact of Kaisa Crisis Likely to Be Felt by Smaller Companies
Although Kaisa appears to have been bailed out by Sunac, and the strong demand for Shimao’s notes reassured a jittery market, there still may be tough times ahead for Chinese developers seeking financing this year.
Ratings agencies Standard & Poor’s and Moody’s have both warned that developers looking for financing in the coming months will face difficulties.
When coupled with still rising land prices in China, flat housing sales and record levels of unsold home inventories, there will be increased pressure on smaller Chinese developers this year and more cases of larger companies using their superior access to capital to increase market share.