Fixed Income Research

BOCI Fixed Income Research

Rates, Currencies & Credits

China Fixed Income Research

2012 . 05 . 18
(Steve Wang)
+ (852) 39886925 steve.wang@bocigroup.com

2012-2013
Chinese property developers: Offshore bond refinancing needs overall manageable in 2012-2013
2014-2016 20122013 / R ed e mp t ion p r e s su r e on U SD, R M B a n d
con v ert ib l e b on d s i s su e d in th e in t e rn at ion a l ma rk et b y Ch in e s e p rop er ty d e v e lop e rs a re ex p e ct ed to b e h i gh in th e y e ar s of 20 1 4- 2 01 6, b u t on l y at a mi ld le v e l for 2 01 2 - 20 13 .

(Qiong Wu) , CFA

+(852) 39886926 qiong.wu@bocigroup.com

(Vivian Zhang)
+(86) 10-66229195 vivian.zhang@bocigroup.com

2012-2013 / Th e majo rity o f th e r ed e mp t ion p r e s su re s in 20 12 - 20 13 co m e

fro m C B s p u tab le ov e r th e p er iod , wh i ch m e an s su ch p r e s su r e s fr o m matu rin g st r aigh t b on d s ar e o v e ral l v ery li m it ed .

(Lucy Liu)
+(86) 21-20328025 xi.liu@bocigroup.com

// H Y /
d e v elo p e r s can ad op t a n u mb er o f str at eg i es to d ea l an d man ag e th e u p co m in g b on d r ed e mp t ion n e ed s i n th e cu rr en t u n fa v orab l e en v iron m e n t, su ch a s fin d in g w in d ow op p ort u n i ti es t o s e cu r e r e fin a n c i n g w ith n e w b on d / loa n /s h ar e p l ac e m en t s an d st ren gth en in g ca sh flo w s for p o ss ib l e ou t ri gh t c as h red e mp t ion s wit h in c r e as ed sal e s tu r n o v er s, r ed u ce d cap ex ou tlay s, ac ti v e a s s et d i s p os al s a n d p r oj ec t e q u it y sa l e s.

/ We
con t in u e to b e li e v e th e lik el ih o od o f o f f sh o re b on d d ef au l ts fro m maj or Ch in e se p r op e rty d e v e lop er s ar e lo w, as th e ir st rat eg i e s t o m e et th e n ea r- te r m re d e mp tio n n e ed s ar e e f f ect i v e an d th eir p a st tr ack re co rd s a re p ro v en exp e ri en c e s .

This report only represents analysts personal viewpoints, which dont necessarily represent those of BOCI Group and any of its affiliated entities.


Fixed Income Research

Ch in e s e p ro p e rty d e ve l op e r s h a ve b e en a lar g e grou p o f a cti v e i s su er s in th e in t ern ati on a l b on d ma rk et in r ec en t y ear s . Th e cu rr en t to tal amo u n t o f o u t stan d in g o ff sh or e b on d s f ro m th i s s e ctor , in c lu d i n g f ore ig n cu r re n cy b on d s ( main ly in U S D), o f f sh ore RM B -d en o mi n at ed b on d s (b o th in d im - su m an d sy n t h e ti c R MB for m s ) an d c on v ert ib l e b o n d s, i s c lo s e to $3 0. 5b n - eq u i va l en t , m a kin g u p ab o u t 30 % o f th e tota l ou t stan d in g of a ll Ch in e s e in te rn a tion a l b on d s . Mo st o f t h e U S D b on d s we r e i s su ed wit h 5 - 7 y e ar t en or s, wh i le ma n y o f th e , RM B -d en o min at ed b on d s h a v e m atu r ity d a te s at 2 - 3 y ear t er m s. N e a rly a ll o f th e C B s h a v e p u tab l e d at e s a ls o at 2 - 3 y ear te r m s. Th e h i gh r ef in an c in g n eed s in 2 0 14 - 20 16 v s . m i ld o n e s in 20 1 2- 2 01 3 Sin c e m o st o f Ch in e s e p rop erty b on d s w er e is su ed p o s t th e 20 08 - fi n an c ial c ri s i s, th eir r re fin an c in g n e ed s ar e th u s l ar ge ly c on c en t rat ed ov er th e p e riod o f 20 14 - 20 16 ( s e e Fi g. 1 ). Th e re wi ll b e $ 4. 9b n , $7 .4b n an d $7 .1 b n ( U SD eq u i v al en t) o f r e fin an c in g n e ed s ( in b o th r ed e m mp tion s an d p u t s ) in th e y ear s o f 2 01 4, 2 01 5 an d 20 16, r e sp e cti v e ly . Fo r 2 01 4, m o st o f th e r e d e mp t ion p r e s su re co me s fro m the RM B -d en o min at ed b on d s ( 46 % ) an d p u tab l e CB s (2 2 % ). H o w e v er, w e wi ll s ee su rg in g r ed e mp t ion n e ed s in fo re ign cu r re n cy b o n d s d u rin g 2 01 5 an d 2 01 6 ( $6 .1b n an d $5 .7b n , r esp ec ti v ely ). In c on tr a st , w e se e o v er al l a mi ld re fi n an c in g p re s su r e in 20 12 an d 2 01 3 ( $1 .7b n an d $ 2. 0b n , re s p e ct i ve l y ). A d e ta i led lo o k a t th e r ef in an c in g n eed s in 20 12 - 20 13 Be t we en th e s e t wo p r e s si n g y e ar s o f 2 01 2 a n d 20 13, we se e s o me d i f fe r en c e s in th e ir r ed e mp t ion p r of il e s. For 20 12, 37 % o f th e r ef i . n an c in g n e ed s co m e fr om str ai gh t b on d s an d 63 % fr o m CB s, w h il e n e arly 7 1% co m e f ro m CB s in 2 01 3. Gi v en th at we h av e a s su m ed th e p u t d ate s o f CB s to b e t h e ir red e mp tion d at e s th e s, actu a l ch an c e o f a CB g e ts p u t (r ed e e me d at it s r d) p u t d at e i s in r eal ity su b je ct t o mar ke t c on d i tion s a t th e t i me . A s m ark et mo v e s, in ve s tor s k may op t to skip su ch op t ion s an d h o ld on to th e b on d s or may h a v e co n v ert ed th eir b on d s i n to sh a re s a lr ea d y b e fo r e p u t d at e s. In su ch ca s e s, th e r e fin an c in g p r e s su re s in b oth 2 01 2 an d 20 13 co u ld in re al ity b e mu ch lo w er t h an t h e ov er al l d at a h a s p r e sen t ed . H ow e v er , man y o f th e d e v e lop er s with r e fi -

305 30% 5 7 2 3 2 3 2014-2016 2012-2013 2008 2014 2016 1 20142015 2016 49 74 71 2014 46 46% 22% 2015 2016 61 57 1 2012 2013 17 20
1 / Fig. 1: Maturity breakdown of offshore Chinese property bonds (in $bn equivalent)

/Sources: BOCI : /Note: Put dates are used for putable convertible bonds

2012-2013 2012 2013 2012 37% 2012 63% 2013 71%

2


Fixed Income Research

n an c in g n e ed s in 20 12 t en d to h a ve w ea k cr ed it p ro fil e s . Th e y ar e a ll e s se n ti all y H Y c r ed it s, wi th rati n g s ran gin g fr om B - to C C C ( se e Ap p en d ix ). Th e o ff s h or e n e w i s su e mar ke t h a s re ma in ed l arg e ly sh u t f or H Y Ch in e s e c r ed it s at p re s en t t i m e an d p rop erty n am e s r at ed B or b el o w in p art ic u la r. Th e p ro sp e ct f or th e m ar ket t o re op en f or th e s e cre d it s i n th e n ea r fu tu r e con t in u e s to b e g loo m, p u tt in g a l ot of p re s su re on th e m t o f i n d oth er way s to m ee t th e re d e mp tio n d em an d s o n th ei r u p co min g mat u ri n g or p u tab l e b on d s. Str a te g ies to m eet t h e r ed em p t io n d em an d s Am id t h e cu rr en t d o wn tu rn o f Ch in a s re al e s tat e mark e t, eac h p ro p e rty d e v elop e r may h a v e to a d ju st an d r e sh a p e i ts p l an an d s tra te gy to m e et th e u p co m in g d eb t red e mp tion d em an d s. R ef in an ci ng s har es t hr oug h new bond s, loan s or

2012 2013 2012 B- CCC B

Alth ou gh o f f sh o r e b on d mar ke t h a s s e en a su b st an ti al re b ou n d th i s y ea r f ro m th e 4Q 20 1 1 lo w, h ig h co st s ( s e e Fi g .2 ) con t in u e to h a mp e r th e i s su an c e fro m Ch in e s e H Y cr ed i t s. On ly a h an d f u l o f H Y Ch in es e p rop e rty d e v e lop er s w er e ab le t o p ri n t ou t n e w b on d s o v er a w in d ow op p o rtu n ity d u rin g Fe b . -Ap r. th i s y e ar. T h e lu cky on e s in c lu d e Sh u i On , A gi l e, KW G an d C en tr al Ch in a R ea l E s tat e. Th e m ark et h a s sou r ed a ga in af t er th e G r ee k d eb t cr i si s an d p oor mac ro d ata fro m C h in a r eto ok th e ce n t er sta g e. 2 B / Fig. 2: Current yields of selected offshore Chinese property bonds rated B or below
Bonds Yuzhou 13.5% 15 China South City 13.5% 16 SPG Land 13.5% 16 Glorious 13% 15 SRE Group 8.625% 13 Hopson 11.75% 16 Rating B2/B B2/B B3/BCaa1/BCaa1/CCC+ Caa2/B Bid-Yield(%) 19.5 21.2 22.7 22.5 31.2 20.1

2011 4 2 2 4 / / / 3
3

: , /Sources: Bloomberg, BOCI

Ch in e s e p rop e rty d e v e l op e r s h a v e al s o b e en in c re a sin gly t u rn i n g t o of f sh o r e s y n d i cat ed b an k loan ma rk et f or f u n d in g n e ed s. A lth ou gh mo st of th e Ch in e se d e v el op e r s h a v e b ee n u sin g on sh or e b an k l oan s an d c red it lin e s fo r p roj ec t c on stru ct ion s, su ch lo an s/ cr ed it l in e s


Fixed Income Research

are n ot a llo w ed to b e u s ed eit h e r f or cap i ta l p u rp o s e s s u ch a s lan d acq u is it ion s or fo r b on d re fi n an c in g/ rep ay me n t s u n d er th e co m mo n gu id e lin e s o f Ch in e se b an k s. Loan s /c re d it li n e s rai s ed of f sh or e, h o we v er, h a v e n o su ch re s tri c tion s. F ig . 3 l i st s r e c en t ex a mp l e s o f sy n d i cat ed loan s ra is ed o f f sh or e b y Ch in e se p r op erty d ev el op e r s. Th e sy n d ica t e d loan ma rk et i s m ain ly li mi ted to la rg e d e v elo p er s a t th i s p o in t, a n d s ma ll er o n e s w ith w eak cr ed i t p ro f il e s sti ll h a v e v ery li m it ed a cc e s s. Cap ita l r ai s in g th r ou g h sh ar e p la c e m en t h a s s e en f e w su cc e s s for th e Ch in e s e d e v el op e r s si n c e l a st y ear . G i v en th e s e v er ely d ep r es s ed va lu at ion l e v el for mo s t of th e p rop e rty sto ck s (th e a v era g e d i sc ou n t o f N A V on maj or Ch in e s e d e v elo p e r s i s clo s e t o 35 % ) an d con t in u ed i n v e sto r c on c e rn s on th e p oli cy t i gh t en in g o n th e rea l e stat e ma rk et, sh a re p la ce m en ts ar e co st l y an d ve ry op p or tu n i st ic ( s e e F ig . 4 ). Cas h pa y th ro ugh s tr en gthen ed cas h f l ows As b oth th e sto ck mar k et an d H Y b on d mark et re ma in e s s en t ial ly cl os e d to m an y o f th e h igh ly le v er ag ed d e v el op e r s, t h e c h an ce of r ef in an cin g th e ir u p c o min g b on d red e mp t ion s with n e w d eb t s or n e w sh ar e s i s sl i m i n th e n ea r fu tu r e . Th e p o s s ib i lity o f h a vin g to mak e str ai gh t p ay ou t in c a sh h a s in cr ea s ed . S tre n gth en in g c a sh flo w s as a p r ep ar ati on for su ch u n in t en d ed s c en a rio s h as b e co m e p ara mou n t for th e s e d e ve lop er s . Th e mo st co m mon ad op te d s trat e gy in su c h ca s es i s th e co mb i n ed e f fort s o f in c re a sin g sa l e s tu rn o v er s an d r ed u c in g cap e x ou t lay s. Man y d e v elo p e r s h a v e sp ed u p th e ir p ro je ct tu rn o ve r rat e s th r ou gh p ri c e d i scou n t s or ad ju st in g p rod u ct m ix e s in f a v or of ma s s r e sid en t ia l p rop ert i e s an d co m m er c ial p rop er ti e s, s in c e t h e go v ern m en t s h o m e p u rch a s e -r e st ri cti on p o li c y p ro mot e s fi r st -ti m e h o m e p u r ch a s e s an d p la c e s n o re s tri ct ion s on co m m er cia l p ro p e rti e s . Th e ma rk et h a s in d e ed s een in cr ea s ed sa le s vo lu m e si n c e Ma rch a ft er p o or p er fo r man ce i n Jan . a n d Fe b . H o we v e r, vi s ib i lity on th e sa le s p ro gr e s s fo r th e fu ll y ear r e main s cl ou d ed , a s th e Y TD s al e s of man y d e v el op er s h av e fal l en b eh in d th e i r an n u al ta rg et s . Th i s i s t h e s am e ca s e f or m o st o f th e d e v el op er s wi th b on d re f in an cin g n e ed s th i s y ea r a s l i st ed in Fi g. 5. In th e cap e x fr on t, d e v el op e r s h a ve a f e w op tion s to e ith er r ed u ce or d el ay cap ex ou t lay s. N ea rly a ll d e v el op e r s h av e s cal ed d ow n lan d

3 Fig. 3: Recent / examples of offshore syndicated loans to Chinese developers

Company /Longfor /China Overseas Land /Shui On Date Tenor 4/2012 4/2012 3/2012 3Y 3Y 3Y Amt HK$ 2.43bn HK$ 7.6bn RMB 2.1bn

: / S o u r c e s : C o m p a n y r e l e a s e s , BOCI

35% 4
4 / Fig. 4: Recent share placements by Chinese developers
Company Country Garden Skyfame Realty Date Method Amt Stock px (HK$) discount 7.98% 27.5%

2/201 2.14bn 2 Share placement 5/201 369m 2 1 for 2 rights offer

: / S o u r c e s : C o m p a n y r e l e a s e s , BOCI


Fixed Income Research

5 2012-2013 / Fig. 5: Financials of selected developers with bonds maturing in 2012-2013

) ( Sales progress (in RMB bn) 2011 2012 2011 conYTD contract 2012 sales tract sales sales target 7.4 3.2*(Jan-Apr) 12 43.2 9.9 35.3 10.9 9.1(Jan-Apr) 1.8 (1Q) 9.8(Jan-Apr) 1.6 (1Q) 43 15 40 23 2011 ( ) Selected debt & asset data at the end of 2011 (in RMB bn) Properties under short-term Investment cash construction & comdebt property pleted for sale 4.7 4.3 7.1 38.5 6.5 11.0 16.1 2.2 7.7 2.1 3.6 11.9 0.1 13.5 1.7 13.3 54.9 49.2 84.7 23.4

Company

/Yanlord /Country Garden /Hopson /Greentown SOHO /SOHO China

: , /Sources: Company reports, BOCI */Note:*estimated

acq u is it ion s sin c e 2H 2 01 2 an d man y o f th e m sta rt ed to tak e on n e w p ro je ct s th r ou g h j oi n t v en tu re s . F ig. 6 sh o w s t h e Yo Y ch a n g e s o f lan d acq u is it ion s p a c e f ro m so m e o f th e la rg e d e v el op e r s d u rin g th e fi r st f ou r m on th s o f 20 12 . Th ei r p ac e s h a v e al l s lo w ed d o wn s i gn i fi can tly , d ec li n in g an y wh e re f ro m 16 % to 64 %. Oth er w ay s t o ea s e ca p ex b u r d en s ar e to s lo w con st ru ct ion p a c e a n d t o d ela y d el i v ery sch ed u l e of c o mp l et ed h o m e s. Th e s e m ea su r es wo u ld h el p t o d e lay or p o stp o n e th e con st ru c tio n an d tax p ay ou t s. Th i s i s a p arti cu lar ly e f f ec ti v e op tion fo r d e v elo p e r s w h o h a v e b e en ab l e to ach i e v e a su b st an ti al p re - s el l th rou gh rat io o n lau n ch e d p r oj ec t s ( s u ch a s o v er 5 0 %) d u r in g th e ear ly st ag e o f a p r oj ect d e v elo p m en t. As s et d is pos a ls an d p r oje ct e qu it y s a le s We h a v e al s o se en an i n cr ea s in g n u m b e r o f d e v el op e r s w ith w eak fin a n cia l p ro f il e s u sin g a s se t d i sp o sa ls o r p roj e ct eq u ity s al e s t o rai s e fu n d s. In m an y ca s e s, th i s ap p r oach h a s p r o ven to b e a h igh ly ef f ic ien t op t ion t o b oo st liq u id i ty q u i ck ly , p arti cu lar ly for th o s e wi th l ar ge sto ck s o f in v e st m en t p ro p e rti e s, p rop ert i e s u n d e r con st ru c tion or co mp le te d p rop ert i e s. Gr e en t o w n an d H op son ar e t wo p ri m e e xa mp le s ( s ee F ig. 5 ). Both h a v e la rg e a mou n ts o f sh or t- t er m d e b t s wh i l e ca sh b alan c e s a r e r e lat i ve ly lo w. Gr e en tow n wa s a b l e to ra i s e ab ou t R M B 6b n o f f u n d s q u ick ly th rou gh 6 a s s et an d p roj e ct sal e s si n c e th e en d o f 20 11 . In H op son s ca s e, th e co mp an y h el d a tota l o f R MB 5. 2 b n av ail ab l e - for - sa l e f i n an c ial a s se t s a s o f D e c. 31 , 20 11 . I t ra i s ed RM B 1. 57 b i lli on th rou gh d i s p os al o f ab ou t 18 5 m il lion A sh ar e s in BB M G an d an oth er RM B 3 1. 7 6 mi ll ion t h rou gh sa l e s o f tw o lan d p ar c el s t o i t s

5 2011 6 16% 64% 50%

6 2012 4 / Fig. 6: Land acquisitions by some major developers in the first four months of 2012 (10,000 sqm)
Company /China Overseas Land /China Resources Land /Agile /Longfor /Evergrande Total area 212 57 30 97 284 YoY Chang -64% -58% -51% -48% -16%

: /Sources: E ju.com, BOCI


Fixed Income Research

Ch a ir man r ec en t ly . Ov er a l l d e fa u l t p o ss ib i l it ie s ar e lo w We con t in u e to b el i e v e th e l ik eli h ood o f o f f sh o r e b on d d e fa u lt s fr om maj or C h in e s e p rop erty d e v el op er s i s lo w, al th ou gh th ei r o v e ral l cr ed i t ri sk h a s ri s en , ma rk ed b y man y r e ce n t ratin g s d o w n gr ad e s f ro m th e th r e e in te rn at ion al ratin g a g en c i es . A s o u r d i s cu ss ion s h ad e x p lain ed ea rli e r, th e se d e v elop e r s h a ve mu lti p l e st rat eg i e s t o d ea l an d man ag e th e ir p r e s en t r e fin an c in g n e ed s, an d m an y of th e s e stra te gi e s are v iab le to l e s s en t h ei r l iq u id ity p r es su r e s . Pa st exp er i en c e s a n d tr ack r e co rd s al s o su p p o r t su ch cla i m s, a s in v e sto rs h a v en t y e t en c ou n ter ed a fu l l -b l o wn d e fa u lt ca s e b y a maj or C h i n e s e d e v el op er so f ar in h i s tory . N e o- Ch in a ca m e in a s th e cl o se s t i n cid en c e, a s th e co mp a n y , on ce on e of th e t o p - 10 Ch in e se d e ve lop e r s b y lan d h o ld i n g s, h ad to s e ll a s se t s an d c al l b a c k it s C B s th at w er e d u e fo r p u t a t a p ri c e o f 6 3 % t o m e et d eb t r ed e mp t ion d e m an d s an d i n t er e s t s er v ic in g b e fo r e b ein g so ld a s a wh o l e to Sh an gh a i In d u s tri al, a l arg e st at ed -o wn ed con glo m er at e. A ft er b e in g acq u ir ed (n ow c al le d Sh an gh a i In d u st ry Urb a n De v e lop m en t ), th e o l d N e w -C h in a d eb t s h a v e b e en e ith er fu lly p a id o r cu rr en tly v alu ed a b o v e p ar.

5 2011 6 / 60 2011 12 31 52 185 A 15.7 3,176 63%


Fixed Income Research

/ 2012-2014 Appendix: Selected offshore Chinese property bonds maturing in 2012-2014

Issuer rating Ba3/BB Ba3/BBBa3/BBB1/B+ B3/BCaa1/B*Caa1/BCaa1/CCC+ Caa1/CCC+ RMB 446.9m CB putable in Jul. $350m in Nov. $139.04m in Jun. RMB 179.6m CB in May $132m in Nov. HK$ 1.46bn CB putable in Jun. & HK$ 1.55bn CB putable in Dec. RMB 3bn in Dec. &RMB 2.72bn CB putable in Sep. $192 in May HK$ 2.8bn CB putable in Jul. $38.666m in Nov. 2012 2013 RMB 781m CB in Feb. $149m in May SGD 375m CB putable in Jul. RMB 1.5bn CB putable in Dec. $71.461m in Apr.

/Country Garden /Road King /Yanlord /Kaisa /SRE Group /Hopson /Shanghai Zendai /Greentown /Coastal Greenland /Mingfa /Shui On /Skyfame Realty SOHO /SOHO China

/Sources: Bloomberg, BOCI


Fixed Income Research

DISCLOSURE
The views expressed in this report accurately reflect the personal views of the analysts. Each analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analysts, BOCI Research Limited and BOCI Group. Member companies of BOCI Group confirm that they, whether individually or as a group (i) do not own 1% or more financial interests in any of the listed corporations reviewed; (ii) are involved in making a market in the securities of China Overseas Land & Investment; (iii) do not have any individual employed by or associated with any member companies of BOCI Group serving as an officer of any of the listed corporation reviewed; and (iv) do have investment banking relationship with Shanghai Zendai Property, Shanghai Industrial Urban Development, Country Garden and China Resources Land within the preceding 12 months. This disclosure statement is made pursuant to paragraph 16 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission and is updated as of 16 May 2012. Waiver has been obtained by BOC International Holdings Limited from the Securities and Futures Commission of Hong Kong to disclose any interest the Bank of China Group may have in this research report.

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