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Developers in distress draw interest of loan buyers

2014-11-18 10:28:28Source:China DailyAuthor:

Potential homebuyers inspect models of residential property at an expo in Henan province. [Photo by Geng Guoqing / Asianewsphoto]

Many waiting for 'large cracks to occur' in nervous mainland real estate market

Buyers of distressed loans are watching China's property market closely as debt soars and growth falters.

Nomura Holdings Inc and Bank of America Corp said they will pay more attention to Chinese developers in 2015, having profited from trades in India, Australia, South Korea and Indonesia.

"There's been a lot of nervousness around the real estate sector in China," said Andrew Tan, Nomura's head of secondary trading for loans and special situations in Asia ex-Japan.

"We've seen some selloff in terms of some of the bigger names in the loan space which, typically, you don't see being offered in the market. They are at high-yield, stressed levels."

The number of publicly traded developers with liabilities exceeding equity in China has jumped to 136 out of 334, or more than 40 percent, from 57 in 2007, according to data compiled by Bloomberg. China's leaders are discussing lowering next year's economic growth target amid falling home prices and rising inventory.

"A lot of people are waiting for large cracks to occur in China, but it's hard to pin down exactly when that will happen," said Kevin Tham, a managing director of Bank of America's global credit and special situations group in Hong Kong.

"Our key themes in 2015 will revolve around deploying capital into more defensive, senior secured loans, while we wait for the next wave of distressed situations to come through."

China's property industry accounted for 16 percent of the country's 7.7 percent economic expansion last year, according to the World Bank.

A survey of economists by Bloomberg News last month showed an expectation for a growth target of about 7 percent in 2015. Home sales shrank 10 percent in the first nine months of this year, with unsold units equal to 14.4 months of contracted sales, Moody's Investors Service said in a Wednesday note.

Non-performing loans at Chinese lenders jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125 billion), the China Banking Regulatory Commission said on Saturday. Soured credit accounted for 1.16 percent of lending, up from 1.08 percent three months earlier. The People's Bank of China has injected 769.5 billion yuan into its banking system over the past two months, stimulus that has done little to ease financing costs for borrowers, according to UBS AG.

"We see new deals getting printed at higher leveraged levels with lighter covenants, so we need to be vigilant," said Singapore-based Tan, ahead of the Euromoney Asia-Pacific Distressed Investing & Corporate Restructuring Summit that starts in Hong Kong on Tuesday.

"Are there signs on the horizon for a correction in the credit space? Definitely."

China's last banking crisis was in the late 1990s when years of State directives saddled lenders with soured loans and forced some $650 billion of bailouts over a decade.

Moody's cut its outlook on China's real estate market to negative in May. Goldman Sachs Group Inc turned bearish on property bonds in September, and called them the riskiest part of the Asian junk bond market last month.

Along with China real estate, Bank of America expects a "spike in activity in public bonds, particularly mining, infrastructure and offshore drilling vessels", Tham said. "Each sector has a universe of several billions of high-yield bonds outstanding. We expect a fair number of these names to transition into the distressed space and are adding resources in trading and research."

Outside of Chinese developers, Nomura is shifting its attention toward coal and iron ore producers, because their fortunes are tied to demand from the world's second-largest economy. The focus is on finding value in "cost efficient" miners and contractors, "those with a fighting chance of survival", Tan said.

Nomura lists trades in India among its notable wins in the secondary market this year. Narendra Modi's election as prime minister in May spurred confidence in India's economy, spurring an increase in the price of loans from phone operators to steelmakers, he said.

"There was a decent selloff in the loan space by European and Australian banks" in late 2013 and early 2014 before Modi's election win, Tan said. "That's one of the themes we have been involved in."

Nomura and Bank of America snapped up distressed assets in Australia when European lenders and portfolio managers cut their holdings and shifted capital back home as some assets underperformed.

Toll operator BrisConnection Management Co and Melbourne-based oil producer Nexus Energy Ltd were among companies that went into administration, stock exchange announcements show.