Thursday, August 28, 2008
China Firms Dial Up Debt Issues - WSJ
Corporate bond issusance soared +50% to $25 bil, as other equity windows close. But most deals are privately brokerd by hedge funds. Teh bulk of issuers are property builders as they are furthe pincked by slumping housing market..... HONG KONG -- Corporate China is turning to debt now that its years-long love affair with stocks is on the rocks. Many of mainland China's major companies are issuing billions of dollars in corporate bonds, even as the rest of the world shies from debt. Investors are encouraged by expectations of a rising yuan, which would goose returns for foreign bondholders and also helps Chinese firms issue bonds on less-costly terms. Scott Pollack Less-established, cash-strapped Chinese companies, which had been counting on initial public offerings that were scotched by declining stock markets around the world, are finding hedge funds to be the lender of last resort, although the loans sometimes come at a heavy price to the borrower. China's ailing stock market, skittish bank lenders and Beijing policymakers hoping to tame growth and slow inflation have curtailed other routes to raising capital. After nearly doubling in 2007, the benchmark Shanghai Composite index is down more than 55% this year. "The equity market is pretty much closed," sad Neil Ge, who has been appointed to run Credit Suisse's mainland securities business. "For corporations to raise money, the only way is to tap the bond markets." Mainland China's corporate-bond issuance has jumped almost 53% this year to date from the same period in 2007, with Chinese companies selling about $25 billion in bonds, according to Thomson Reuters. Bankers say their China pipelines remain flush for the next few months. "We are expecting issuance to be twice as big as it was last year," Mr. Ge said. China's bond market is still tiny in comparison to the U.S., which has sold $1.2 trillion in bonds this year. Still, issuance in the U.S. is down 41% from last year, according to Thomson. In Japan, corporate-bond issuance has fallen 6% in dollar terms. The credit crunch has reduced demand for higher-yielding, higher-risk debt, while corporations of all stripes have come under pressure to reduce the amount of debt on their balance sheets. China has helped send Asian corporate bond issuance to record levels. Proceeds from corporate debt sales in Asia, excluding Japan, stand at $91.01 billion so far this year, up 3.6% from a year earlier, according to Thomson. In July, Beijing North Star Co., a publicly traded property company partly controlled by the Beijing city government, sold about 1.7 billion yuan (around $248 million) in five-year bonds. Earlier in the year, Shenzhen Development Bank Co. issued bonds totaling 6.5 billion yuan. Oil producer PetroChina Co. and China Merchants Bank Co. are seeking approval to sell new bonds valued at a combined total of as much as 90 billion yuan. Beijing North offered investors a coupon rate of 8.2%; Shenzhen Development Bank is paying 6.1%. China's corporate-bond market also benefited from a regulatory change. Last year, new rules from the China Securities Regulatory Commission let publicly traded companies in China sell corporate bonds over the same Shanghai-based system that distributes initial public offerings of stock to individual investors. While the bulk of these bonds are sold domestically, foreigners can buy a limited supply through a government program. Western investment banks are eager to grab the underwriting business, but few are eligible. Chinese regulators require them to have an approved venture on the mainland and first obtain an underwriting license there. UBS AG dominates among Western banks; Credit Suisse hopes to compete in this area soon. Chinese property companies are among the biggest issuers of new debt, as a weakened domestic real-estate market has put further pressure on their finances, said an investment banker at UBS Securities, the bank's Chinese unit. Meanwhile, the more cash-strapped Chinese companies have won financing only through private deals with hedge funds, which are charging hefty rates in return for capital. Hedge funds active in private debt include Milwaukee's Stark Investments and New York's D.E. Shaw Group, as well as the internally run hedge funds of large banks, such as Merrill Lynch & Co. and Deutsche Bank AG. The funds hope to obtain better returns in private deals than possible now from stocks. "The market being what it is, the only thing they've got left is private deals," said Peter Churchouse, a fund manager at LIM Advisors, a hedge-fund firm in Hong Kong. In July, internal hedge funds at Merrill Lynch and Deutsche Bank pumped approximately $500 million into Guangzhou property company Evergrande Real Estate Group, according to people familiar with the matter. It was their second infusion in recent months into the company after a hoped-for initial public offering of stock faltered. Private Affairs Because such deals usually aren't disclosed publicly, details on amounts and terms are hard to come by. Evergrande didn't respond to calls or emails seeking comment. But in many cases, hedge-fund managers said, the loans can be expensive. Hedge funds say interest rates on some deals have risen to the high teens, and in some cases exceed 20% compared to 8% to 10% last year. Capital controls on the mainland mandate that these private loans are denominated in a foreign currency and reside offshore. Some deals contain what are known as "ratcheting provisions," say people familiar with the terms, which allow debt holders to purchase unspecified amounts of stock at discounts over time and may give them larger equity stakes than business owners intended. Crackdown Coming? Some investors say they worry that the terms could invite a crackdown on foreign firms. A decade ago in the U.S., deals that gave lenders ever-higher equity stakes became known as "death spiral convertibles." In several instances, companies later alleged in lawsuits that the bondholders sold shares short to push down prices so they could acquire large chunks of equity. Short sales involve selling borrowed stock in a bet that the price of those shares will fall before the loan has to be repaid. Hedge funds say that under terms in China, lenders typically can't wind up with a controlling stake in a company.