China developers seek alternative finance as offshore market dries up

HONG KONG (Reuters) – Chinese property companies are having to turn to more expensive sources of finance as problems at developer Kaisa Group <1638.HK> make it increasingly difficult for them to get credit in the offshore market.

Kaisa’s failure this month to make an interest payment on a dollar bond has left investors worried about whether other developers can service their debt.

January is usually a busy month for developers to raise funds offshore. However no high-yield bonds or syndication loans from Chinese property companies have been seen so far, due to a reluctance from investors and lenders to take on more of this debt until they see what happens to Kaisa.

Officials at four property developers in the private sector told Reuters they are trying instead to get loans in the onshore market, a route that comes with higher interest rates. They are also considering project finance – where investors finance a specific development project through a combination of debt and equity.

“We had an internal discussion about this and we may resort to equity financing if we have to,” said a member of the corporate finance team at listed-developer based in eastern China.

“We didn’t like to have a partner in the past because we wanted to have full control on our projects.”

Local government officials blocking real estate sales and anti-corruption probes are adding to worries about the prospects of companies in China’s already highly leveraged property industry, weighing on their share and bond prices.

One major concern for offshore creditors is how they would be treated if a company were to default on their debt, given that most of their assets are in mainland China and the legal route to stake a claim over them is unclear.

Developers are now trying to provide assurances to these creditors that they can easily get money to offshore investors in the event of a sudden cash call.

“If we want to transfer funds offshore, there’s a lot of ways to do it,” Fantasia Holdings <1777.HK> chief financial officer Tony Lam told investors in a call last week.

Fantasia’s shares have fallen more than 12 percent in the past week, hit like other midsize developers by concerns they could face similar problems to Kaisa.

Corporate finance officials at other property companies said one way they can get cash to investors outside China is by collateralising cash deposits or assets at onshore banks, and then getting a Standby Letter of Credit (SLOC) to obtain loans from offshore banks.

These reassurances have been given some credence by analysts, who say some of the investors’ nerves about developers’ ability to manage their debt are now starting to look overblown.

“While the recent concerns over bankruptcy and corruption do adversely affect the overall sector’s performance, we believe the impact to be temporary and, thus, provide, another potential investment opportunity,” analysts at Barclays wrote in a note on Monday.