Kaisa Fire-Sale Exposes China Property Contagion

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by Tyler Durden
Monday, Nov 08, 2021 - 09:11 AM

By Richard Frost, Bloomberg Markets Live commentator and reporter

Kaisa is showing that Evergrande was just the tip of the iceberg when it comes to the challenges facing China’s real estate industry.

Kaisa is putting up 18 projects in Shenzhen for sale, with a total value estimated at about 82 billion yuan ($13 billion), according to reports on Friday. That’s after the company said it was facing “unprecedented pressure on its liquidity” and missed payments on high-yield consumer products it had guaranteed.

With more than $11 billion of dollar bonds outstanding, Kaisa is the nation’s third-largest dollar debt borrower among developers. Of particular concern to investors was that Kaisa struggled to find cash to repay onshore, yuan-denominated liabilities to Chinese mom-and-pop investors, according to Pantheon Macroeconomics’s Craig Botham. It “bodes ill” for dollar debt repayments owed largely to foreign funds, he wrote in a Monday note.

While Chinese authorities have told developers to not default on dollar debt, missing onshore payments to retail investors could risk social instability. Kaisa’s fire sale may buy it some time -- the company’s bonds rose in reaction to the news.

But the firm has far bigger bills to pay: it reported 238 billion yuan in total liabilities as of June 30, according to its interim release. It had 25 billion yuan of debt payable within a year, the report showed, with senior bonds that were secured by the pledging of shares in Kaisa’s offshore subsidiaries.

Those pledges are in turn guaranteed by some of Kaisa’s other units. Kaisa’s shares plunged to a record low on Thursday before trading was suspended.

Its 6.5% bond due December is priced at just 52 cents on the dollar even after rallying on Friday, a sign investors expect sizable haircuts. Just two months ago it were trading at par. 

Chinese property companies’ ability to repay debt is being squeezed by surging borrowing costs, falling home sales and tumbling asset prices.  Junk dollar bond yields have climbed toward 22%, making tapping the offshore market too expensive.

Dumping inventories on the market is likely to add to pressure on property prices, according to Botham, who is chief China economist at Pantheon Macroeconomics.

"The challenges facing the property sector are systemic, and intensifying,” he wrote. "We expect property to exert an increasing drag on growth throughout this year and next."