Chinese Developer Appears to Default - Kaisa Group Owed Interest Payments on Offshore Bonds
By Wayne Ma And Fiona Law
Jan. 8, 2015 12:50 p.m. ET
SHENZHEN, China—A Shenzhen real-estate developer with seemingly sound finances likely became the first Chinese property company to default on offshore bonds Thursday, in a development that is raising concerns among global investors.
Kaisa Group Holdings Ltd. appears to have missed interest payments due on $500 million of debt held by foreign investors, several managers of funds that hold the bonds said. Although the company has a 30-day grace period to pay after the due date, missing the deadline would put Kaisa in technical default, analysts say.
On Thursday evening, a Kaisa representative said he didn’t know whether the company had paid. More than two dozen foreign fund companies ranging from BlackRock Inc. to Fidelity Investments and Lion Global Investors owned Kaisa debt in recent months, according to Thomson Reuters, although it isn’t clear how many currently hold the debt. BlackRock and Fidelity declined to comment, while a spokesperson for Lion Global, a Singapore-based fund company, said it has sold its holdings.
Several fund managers said that the situation is heightening market fears, making foreign investors wary of Chinese property bonds overall and anxious about whether other seemingly healthy companies in the sector could melt down as well. Kaisa’s difficulties, which appear to stem from government intervention in a real-estate company, have added to concern about the risk of investing in Chinese bonds more broadly.
“Within a four-week period, we had this almost collapsing situation in Kaisa’s operating profile, which would heighten investors’ sensitivity to the sector,” said Charles Macgregor, Asia head at the credit-research firm Lucror Analytics.
A default, if confirmed, would be the more shocking because it was so unexpected, investors say. Kaisa was seen as in good financial shape, with a healthy portfolio of commercial and residential projects, strong sales and solid cash flow that had made its bonds popular with investors. Kaisa’s net profit in the first half of 2014—the latest figures available—rose 30% versus the previous year to 1.33 billion yuan ($214 million), with revenue of 6.79 billion yuan. As of June 30, the 16-year-old company, which is listed on the Hong Kong exchange, had cash of 9.38 billion yuan versus short-term debt of 6 billion yuan.
But during the space of the past few months, the Shenzhen government has blocked approvals of Kaisa developments and property sales in the city, home to some of its major developments—actions the company said in a Dec. 21 statement could have “an adverse impact on cash flow.” Kaisa’s founder and long-time chairman, Kwok Ying Shing, has quit, along with a number of top executives and board members. Neither the government nor Kaisa executives have offered explanations.
On Jan. 1, the developer said it defaulted on a $51.6 million loan from HSBC Holdings PLC, and credit raters Standard & Poor’s and Moody’s Investors Service have downgraded Kaisa’s debt from just below investment grade to ratings that reflect an expected default. Kaisa’s bond prices have plunged more than 80% since the end of November, and are now trading at around 33 cents on the dollar. Its stock price has fallen more than 60% to 1.59 Hong Kong dollars over the same period.
Trading in the stock has been halted since Dec. 29.
Many Chinese property companies are heavily indebted, struggling with a weak housing market and difficulties in raising cash to pay back loans. Worries are mounting over the impact of China’s economic slowdown and the rising amount of debt among local government-connected financing vehicles, though recent government efforts to ease funding conditions have relieved some concerns. China has $55.7 billion in offshore property debt, according to Dealogic, a data-tracking company.
Kaisa, founded by Mr. Kwok in 1999, seemed to be one of the sector’s stronger firms. The company has grown rapidly over the past few years: It employed about 9,500 people as of the middle of last year, up from 2,700 in 2009. In the first 11 months of last year, Kaisa’s sales totaled 3.72 billion yuan, double the amount in the same period in 2013.
The company was ranked No. 1 in residential-property sales in Shenzhen during the first half of 2014, according to SZHome.com, an industry website.
Current and former employees say the company emphasizes efficiency and encourages employees to make simple decisions, such as the approval of subcontractors or expenses, within four hours. Industry insiders say that Kaisa has a reputation for finishing large projects within a year, a pace that is faster than the industry average.
In October, however, the Chinese government said a high-ranking Communist Party official who had been associated with Shenzhen’s Longgang district, where Kaisa is developing several big projects, had been placed under investigation. State media later said the investigation was related to corruption in real estate. Some Chinese media also reported that Mr. Kwok had been detained or was unreachable, which the company denied.
In late November, Kaisa discovered that some sales and construction had been blocked by the Shenzhen government, the company said in a December statement. Later, it found that other approvals and projects had been blocked as well. Authorities in Longgang notified Kaisa in December that it had suspended processing of approvals and applications for all of the company’s construction projects in the district, Kaisa said.
At one of those projects in Longgang—the Kaisa City Plaza—staff at a sales center containing a grand staircase, marble floors, crystal chandeliers, gold-plated bathroom fixtures and a small projection theater were still showing around prospective buyers on a recent afternoon. As the sound of whirring saws rose from inside the development, employees said Kaisa could finish work on existing structures but could no longer sell property or begin new construction.
Outside the complex, some homeowners had gathered looking for information, with one saying she was nervous about her recent purchase of a three-bedroom apartment there. The homeowners said they had received little information from Kaisa about the state of their properties.
One woman, who asked to be identified only by her surname, Ye, said she had bought property from Kaisa two years ago, and is confident the current problems will be resolved. “Kaisa is well known,” she said. “The quality of their housing is good and their locations are good. I’m still coming to look.”
Authorities in Shenzhen have barred Kaisa from selling properties.
Full article: http://www.wsj.com/articles/chinese-developer-appears-to-default-1420739433
Write to Wayne Ma at wayne.ma@wsj.com and Fiona Law at fiona.law@wsj.com