Chinese developers slump as Shimao bonds plunge

Beijing

A WAVE of selling swept through Chinese developers' bonds and shares after the sudden plunge in a major property firm's notes renewed concern over the health of the sector.

Shimao Group Holdings' dollar notes dropped as much as 9 cents on the dollar, with the selloff spreading to other company bonds including Sunac China Holdings and KWG Group Holdings.

Trading was halted in six of Shimao's yuan bonds after they plunged, with one falling more than 50 per cent. A Bloomberg Intelligence stock index of real estate firms slumped 2.8 per cent, led by a 12 per cent drop by Shimao.

The company said it's looking into market rumours which it blamed for causing the sell-off, according to an e-mailed statement. The declines broke the buoyant mood that dominated trading last week, when Beijing's shift toward pro-growth policies helped drive yields on Chinese junk dollar bonds down the most in seven years.

Optimism over further easing steps had helped counter the long-anticipated defaults by China Evergrande Group and Kaisa Group Holdings. The inclusion of the phrase "housing is for living in, not for speculation" by the Communist Party's top decision makers at the end of an annual economic conference added to concern.

The phrase - which President Xi Jinping has stressed many times - hadn't been used in Politburo's preparatory meeting last week. Bruce Pang, head of macro-economy and strategy research at China Renaissance Securities Hong Kong, said: "I don't think China will completely relax property policies."

Other developer shares also retreated. Sunac China Holdings plunged more than 7 per cent. Agile Group Holdings slid 6.4 per cent. Sunac's dollar bonds fell as much as 5 cents on the dollar, according to credit traders. KWG's dollar bond due 2023 declined 2.8 cents to 82 cents.

Shimao is China's 13th biggest developer by contracted sales and among the largest property debt issuers with about US$10.1 billion in outstanding local and offshore bonds. The company has a junk Ba1 long-term rating from Moody's Investors Service and is on review for a further downgrade.

Shimao lost its investment-grade rating at S&P Global Ratings last month, but has an investment-grade rank of BBB- at Fitch Ratings.

A bond issued by one of Shimao's local units suffered the largest haircut in China's exchange-traded repo market last week, according to Bloomberg-compiled data. Borrowers putting up a Shanghai Shimao Jianshe note due 2025 for collateral get just 35 per cent of the note's face value as cash, down from 50 per cent the prior week.

Shimao's dollar bond due 2022 fell 12.4 cents on the dollar to 75.7 cents, set for its lowest price in about month, Bloomberg-compiled prices show.

"A major price collapse or a downfall of Shimao will cause lapse in confidence in cross-over investment grade names in China property, which acts as the final refuge for the sector," said Anthony Leung, head of fixed income at Metropoly Capital HK.

The impact could be more devastating than debt crises at Evergrande or Kaisa because they were of much lower credit quality, he added. Shimao's contracted sales will be weaker than S&P previously forecast due to "tough" business conditions, while the company may struggle to deleverage in the next 12 months, the credit assessor said on Nov 10.

China's property developers remain under pressure from slowing sales and a wall of bond maturities coming due in January, according to Citigroup analysts. That means credit stress has yet to reach a maximum and weaker firms are likely to default, the analysts said. BLOOMBERG

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