China builder CIFI falls deeper into distress despite state help

A Chinese developer among a rapidly dwindling group still able to access financing has found that's no panacea amid a broader property debt crisis that policymakers are increasingly trying to defuse.

CIFI Holdings Group, China's 15th-largest developer by contracted sales this year, is among a select group of real estate firms that recently received state guarantees on local debt sales. Just weeks after that, though, its problems are rapidly multiplying, underscoring the limits to official steps to support the real estate industry.

The Shanghai-based builder of residential projects and shopping malls suffered a 17 US cent slide in one of its dollar bonds on Thursday (Oct 6) to a record low of 27 US cents. That's a deeply distressed level, all the more striking given the bond was trading above 89 US cents less than three weeks ago.

Shares of the developer, which sells luxury villas and apartments from northern cities such as Beijing and Tianjian to the Yangtze River Delta, dropped 15 per cent drop to tie a record low.

The tumbles came as people familiar with the matter said the developer is in discussions with banks to extend interest payment on an offshore loan. Adding to signs of strains, Moody's Investors Service cut its ratings Thursday citing CIFI's "elevated refinancing risks". S&P Global Ratings this week pulled its grades at the builder's request following two downgrades deeper into junk last month.

The problems at CIFI highlight the challenges for Chinese authorities as they seek to prevent a slump in the property industry from fuelling broader financial market contagion, while also delivering on long-held goals of cutting excessive leverage and making homes more affordable. A crisis in developer debt that began with property giant China Evergrande Group two years ago has pushed yields on junk dollar bonds from the nation - most of which are from builders - above 25 per cent, effectively shutting them out of the market.

Policymakers have stepped up support for the troubled industry. CIFI is among a small group of builders that recently issued yuan bonds under a scheme that emerged in August for a state-owned firm to guarantee some developers' new local debt sales. While that programme initially sparked a broad rally in Chinese junk debt, traders have more recently been looking for more supportive steps as signs of debt strains spread.

CIFI's investor relations department didn't immediately respond to emailed requests for comment and couldn't be reached by phone.

Weak sentiment weighed on dollar bonds of other large Chinese builders, some of which have also sold state-guaranteed onshore notes. Debt from Country Garden Holdings, the country's biggest developer, fell nearly 5 US cents while investment-grade Longfor Group Holdings dropped 3 US cents. Like CIFI, their notes Thursday were on pace for the largest declines in a week.

"At the moment, investors do not have any certainty on market direction and policy effectiveness," said Zhi Wei Feng, a senior analyst at Loomis Sayles Investments Asia. "We will need to see sustained improvement in property sales and clarity on how the government will resolve the developers' funding issues."

Authorities have extended more help recently with the central bank and top financial regulator telling six major banks to offer some US$14 billion each in financing support to the embattled sector. Policymakers have been stepping up such measures as new-home sales continue to fall. BLOOMBERG



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