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Country Garden, Longfor and Midea Real Estate's bond issuance plans boost for stricken Chinese property sector

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Mainland Chinese developers' plans to issue bonds backed by credit-risk hedging tools signal more support by Beijing for the battered sector, which has suffered from surging bond defaults and coupon payment delays since last year, analysts said.

Country Garden, Longfor Group Holdings and Midea Real Estate Holding this week plan to issue yuan-denominated bonds supported by either credit default swaps (CDS) or credit risk mitigation warrants, according to term sheets seen by the Post.

The notes come at an opportune time for mainland developers whose home sales have taken a hit due to Covid-19 lockdowns, further squeezing liquidity.

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More private companies are likely to tap the bond market, which will benefit developers that have relatively sound financial fundamentals and momentum, said Zhang Bo, chief analyst at 58 Anjuke Real Estate Research Institute, a Shanghai-based property research firm.

Workers walk past a construction site of Country Garden in Kunming, Yunnan province. Photo: Reuters alt=Workers walk past a construction site of Country Garden in Kunming, Yunnan province. Photo: Reuters>

"The credit risk protection tools will enhance credit safety and attractiveness of developers," which is in line with the central government's direction to correct overly-tight restrictions, he added.

Foshan-based Country Garden will announce a plan to issue a three-year bond of up to 500 million yuan (US$73.6 million) with a coupon of around 4.5 per cent to 5 per cent on Tuesday, according to the term sheet.

"Under the guidance of the central government and the facilitation of the China Securities Regulatory Commission, stock exchanges are actively advancing the open-market financing by high-quality private developers," Country Garden said in a note seen by the Post.

A spokesman for Country Garden confirmed the bond plan, but declined to elaborate further.

The move comes as Beijing lowered mortgage rates by 20 basis points for first-time homebuyers on Sunday, aiming to revive a market that has been suffering from Beijing's deleveraging campaign and tight property policies to curb a bubble. Private developers, in particular, are largely being shunned in the primary bond market, while state-owned developers are much less impacted.

A subsidiary of Longfor will issue a six-year, 500 million yuan bond, with a coupon of 3 to 4 per cent on Tuesday. A one-year CDS will also be issued.

"This is the first time that we can remember China developers are issuing public debt with credit risk protection, which should encourage the market's participation," Raymond Cheng, analyst at CGS-CIMB Securities, said in a note on Monday. "If this can be executed properly, we think that it could extend to some other developers with weaker balance sheets to issue similar debts as well."

Midea's property unit will issue a four-year bond of no more than 1.44 billion yuan, with an interest rate of 4.1 to 4.9 per cent. The bond is expected to be confirmed among investors on Tuesday.

Longfor and Midea did not reply to requests for comment.

Analysts at Jefferies, however, pointed out the bond issuance will have a limited impact on the wider property sector.

"We don't expect it to be widely extended to other private developers, so it would not significantly improve short-term liquidity of the distressed developers," analysts led by Stephen Cheung wrote in a report on Monday.

The Hong Kong-listed shares of Country Garden jumped 10.4 per cent to HK$4.88 on Monday. Its US$500 million bond due in September 2025 was indicated at 63.976 cents on the dollar compared with 60.718 cents on Friday.

Longfor's shares added 2.7 per cent to HK$46.49, while Midea Real Estate rose 7.9 per cent to HK$15.04.

Additional reporting by Pearl Liu

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.