Chinese property stocks deepened their losses in Hong Kong trade on Friday, after the developer Kaisa Group Holdings (HK:1638) asked for trading in its share to be halted, pending the release of insider information. It has yet to release that.
Kaisa has reportedly missed a payment to Chinese investors on a wealth-management product that is guaranteed by the developer. Chinese developers have used shadowy wealth products to raise money from retail investors, often without telling them how that money will be invested.
Declarations made by executives at Evergrande indicate that some of its wealth-management proceeds were used to settle invoices with contractors and suppliers, and otherwise fund construction of properties. They don't appear to have been invested in public markets, as people buying the funds may have assumed.
Kaisa requested a trading halt in the parent company as well its listed subsidiaries Kaisa Capital Investment Holdings (HK:0936), Kaisa Health Group Holdings (HK:0876) and Kaisa Prosperity Holdings (HK:2168).
The Hang Seng Properties Index fell 1.0% before a rally right at the close saw it pare losses to 0.5%. It has lost almost 20% in the last two weeks. Troubled developer China Evergrande Group (EGRNF) (HK:3333), its most-indebted homebuilder, saw its shares fall another 2.5%, taking their year-to-date losses to 83.7%.
Kaisa has the second-largest amount of offshore U.S. dollar debt coming due in the next year among Chinese developers, behind only China Evergrande. Both are based in the southern boomtown of Shenzhen, China's equivalent of Silicon Valley, just across the border from me here in Hong Kong.
Kaisa was the first Chinese developer to default on a U.S.-dollar bond, way back in 2015, but its business has recovered to the point that it ranked 19th among China's largest listed developers. In 2020, it even won industry accolades for financial stability.
The company on Thursday admitted it is facing unprecedented pressure on liquidity, due to the problematic property market in China, where sales are slowing and prices falling, as well as ratings downgrades from debt-rating agencies. Both Standard & Poor's and Fitch downgraded Kaisa again on Wednesday.
S&P said that Kaisa's capital structure is "unsustainable," with US$3.2 billion in principal due on offshore bonds in the next 12 months through October 2022. That includes US$400 million due on December 7. The company would have to sell assets and overhaul its capital structure to avoid defaults, the ratings agency says.
It will have between US$2.2 billion and US$3 billion due in maturities of offshore bonds every year from 2023 through 2025, S&P says.
Kaisa shares have fallen 71.7% this year. Its June 2024 bonds are trading around 27 cents on the dollar.
Kaisa is looking to sell its entire 67.2% stake in Kaisa Prosperity, its property-management unit, Reuters reported last week, as well as two residential sites it acquired last year in Hong Kong. Kaisa Prosperity has a market capitalization of US2.3 billion. But no clear bidders have emerged on any of the assets.
Kaisa even went back to the debt market in May, selling US$300 million in U.S. dollar "sustainable" bonds that come due in June 2026 and yield 11.65% at face value. It says it booked orders worth US$2.5 billion from 139 institutional investors. A host of foreign and local banks ran the book on the bonds, including Barclays, Credit Suisse, Deutsche Bank, HSBC and UBS, although notably there were no U.S. financial institutions involved.
It had C¥123.8 billion (US$19.3) in total debt as of the end of June, with C¥71.7 billion (US$11.2 billion) of that in the form of U.S. dollar senior notes, Reuters reports.
Prior to a government crackdown on leverage at Chinese developers, the high-yield bonds of those companies were in high demand. But Chinese regulators in August 2020 introduced a policy of the "three red lines," limiting how much developers are allowed to borrow. Developers have to maintain a liability to asset ratio of less than 70%, a net gearing ratio of less than 100%, and a cash to short-term debt ratio of more than 1x. The vast majority are scrambling to meet those requirements.
Kaisa confirmed its presence at a meeting last week with regulators in Beijing in which they were warned to alert authorities if they are about to run into financial trouble.
The National Development and Reform Commission and the State Administration for Foreign Exchange jointly called together eight prominent developers, telling them to optimize their debt structures, report details of repayment plans and any problems, and "jointly maintain their own reputations and the overall order of the market."
Like Kaisa, Evergrande is also attempting to sell its property-management arm to raise funds, as well as its main building in Hong Kong. But a deal fell through last month to sell 50.1% of Evergrande Property Services (HK:6666) for HK$20.0 billion (US$2.6 billion) to rival Chinese developer Hopson Development Holdings (HK:0754).
Likewise, the state-owned developer Yuexiu Property (HK:0123) pulled out of a US$1.7 billion deal to buy Evergrande's flagship office in Hong Kong, with the Yuexiu board concerned that the company's unresolved debt obligations may disrupt any sale.
Kaisa hopes to sell 18 mainly retail and commercial properties in Shenzhen by the end of next year, which should raise C¥82 billion (US$12.7 billion) or so, Reuters says, citing a document from the company. It would use that money to pay back its wealth-management products. It has another 95 urban-renewal projects in Shenzhen worth C¥614 billion (US$95.9 billion) that it could also sell to raise capital.
