Another Chinese developer, Kaisa, is sinking as junk bonds sell off

INVESTORS have a new worry in China's battered real estate sector.

Kaisa Group Holdings shares plunged a record 18 per cent in Hong Kong after two credit assessors downgraded the Shenzhen-based developer and said that it may struggle to refinance dollar debt. The company's 6.5 per cent bond due Dec 7 fell 5.9 cents to 52.1 cents on the dollar, poised for a record low, amid a broad sell-off in debt issued by Chinese developers.

The firm is the latest to come under pressure as a spike in borrowing costs crushes property firms with the worst balance sheets. Spreads on Chinese high-yield debt over comparable Treasuries have widened to near record levels after a brief respite last week, making refinancing upcoming maturities prohibitively expensive. At least four Chinese developers have defaulted in October.

S&P Global Ratings and Fitch Ratings cut Shenzhen-based Kaisa by two notches on to CCC+ from B on Wednesday, following a Moody's Investors Service downgrade last week. China Evergrande Group, which has the largest liabilities of any property firm worldwide at about US$300 billion, is due to pay an overdue coupon on Friday.

Kaisa has a US$400 million note due on Dec 7, and US$2.8 billion of dollar bonds maturing in 2022, according to data compiled by Bloomberg. That's on top of about US$1.1 billion of interest payments for next year. While Evergrande hasn't tapped the dollar bond market since early last year, Kaisa sold US$2.4 billion of the notes in 2021.

"The negative outlook reflects Kaisa's sizeable and concentrated offshore bond maturities over the next 12 months, and the company's diminishing liquidity," S&P analysts including Aeon Liang wrote in a report dated Wednesday. "We view the company's capital structure as unsustainable amid challenging operating conditions and a tight funding environment."

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Chinese Estates Holdings, also a major shareholder of Evergrande before paring its stake, sold Kaisa bonds at a loss on at least three occasions in October as the investment firm reduces exposure to embattled Chinese developers. The renewed sell-off comes after Chinese regulators told developers they need to meet all their debt obligations including offshore bond payments.

Fantasia Holdings Group shocked investors this month when it failed to repay a US$205.7 million bond, despite previously signalling that it had sufficient working capital and no liquidity issues.

Kaisa will need to sell assets to help avoid default, although such sales may not be completed in time to cover bond maturities, S&P analysts wrote. The company will need to manage a further US$2.2 billion to US$3 billion of offshore maturities per year over 2023-2025, according to S&P. Fitch attributed its downgrade to Kaisa's "limited" funding access and uncertainty over the refinancing of its dollar bonds given volatility in capital markets, according to analysts.

Kaisa is notable for being the first Chinese developer to default on a dollar bond, back in 2015, before undergoing debt restructuring the following year.

Meanwhile, Reuters reported that Chinese developer Oceanwide Holdings said on Thursday that holders of corporate debt issued by two of its offshore units have taken possession of the debt's collateral after the units failed to repay the maturing notes.

In a Shenzhen Stock Exchange filing, Oceanwide said that the company was in active talks with holders of the two Hong Kong dollar notes, worth a combined HK$2.5 billion (S$433 million), in pursuit of a solution.

Oceanwide also said it was assessing the impact of the share and project collateral takeover on its operations and finances. The announcement is the latest illustration of financial strains on Chinese developers.

Oceanwide Holdings International Co issued HK$1.4 billion worth of notes to a Singapore-based financial services firm in March 2019, using its shares in China Oceanwide Holdings and a San Francisco project as collateral, Oceanwide said.

Another unit, Oceanwide Holdings International Financial Development Co, had issued notes worth HK$1.1 billion to Spring Progress Investment Solutions, Oceanwide said. The unit also used its shares in two companies, including China Tonghai International Financial, and a San Francisco project as collateral. BLOOMBERG, REUTERS