Mainland builders in rush to raise cash

HONG KONG: Mainland property developers are rushing to stock up on cash now on fears that the overheated housing market will fall in the second half of the year although their funding costs are soaring as a result.

Shenzhen-based Kaisa Group Holdings, which raised HK$3.21 billion (RM1.33 billion) in December in an initial public offering (IPO), has launched a US$350 million five-year bond paying a 13.5% interest rate, the highest so far for a mainland developer.

According to a statement filed with the Hong Kong stock exchange yesterday, US$86 million raised from the bond issue will be used to repay the balance of a US$200 million loan from Credit Suisse. The rest will be allocated to funding new property projects.

Kaisa has already used HK$556.7 million of the net proceeds from its IPO to pay off a portion of its borrowings, which stand at 6.55 billion yuan (HK$7.45 billion), according to its annual report for last year.

Credit analysts said newly-listed, smaller debt-laden developers with a lower credit rating such as Kaisa would rather pay investors a higher rate now in case property prices dipped later in the year. This is because investors might ask for higher interest rates if the housing market weakened, raising the risk for property companies.

Last week, Evergrande Real Estate issued another bond worth US$600 million, paying 13%.

"The pricing is higher for Kaisa and Evergrande because they have shorter track records compared to firms such as Country Garden [Holdings]," Christopher Lee, an analyst at Standard & Poor's, said. "It's an opportunity now to raise capital for land acquisitions later this year."

Lending on the mainland has been curbed, leaving limited choice for developers that are short of cash. Beijing has announced measures to cool the property market.

Local onshore banks are not allowed to extend short-term credit to pay land premiums and recent regulations dictate that 50% of land premiums must be paid up front, with the balance within a year, says Brayan Lai, a credit analyst at Credit Agricole Corporate and Investment Bank, in a research note.

Kaven Tsang, an analyst with Moody's, said Hong Kong-listed mainland property firms would rather face foreign exchange risk by borrowing from international investors in US dollars than issue yuan-denominated bonds to mainland investors.

"The Hong Kong-listed firms are incorporated in jurisdictions such as Bermuda or the Cayman Islands," Tsang said. "It's not that they can't borrow in yuan but it takes longer and there are more procedures in [issuing] yuan-denominated bonds for these firms compared to the mainland-listed companies."

In the past fortnight, developers such as Evergrande, Country Garden and Agile Property Holdings have all issued offshore bonds, raising a total of US$1.8 billion, paying bondholders from 8.875% to 13%. Analysts expect a correction in the second half in the mainland property market, adding that there would be more offshore bond issuance in the coming months.

Tsang said mainland developers might also sell bonds through private placements, as they prepared for further credit tightening by lenders.

Kaisa, which counts Singapore's sovereign wealth fund Temasek Holdings and private equity firm Carlyle Group among its shareholders, has already reduced its net debt ratio to 42.5% last year from 184% in 2008, according to its annual report -- South China Morning Post
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