Some observations from SCMP about Chinese developers on perpetual bonds. ==> What is/are the issues? Generally Chinese developers issue perpetual bonds to fund their property development activities. These developers put perpetual bonds as equity in their interim reports. Moodys has taken the opposite tack ie. by reflecting them as liabilities due to its debt-like features of interest rates and redemption possibility. Consequently indebtedness is worse than shown in their interim results for two reasons. 1) There is a rising number of issued perpetual bonds and; 2) limited disclosure on their terms. These add to investors concerns about their financial health at a time when the property sector is struggling with an industry downturn. The lenders are drawing interest payments every year regardless of sales level and may even be able to withdraw lump sum as repayments as creditors if necessary. ==> What are the observed occurences? Evergrande, Guangzhou R&F, Greentown China, Fantasia and Kaisa have issued such bonds Until the end of June, Evergrande had the highest amount of perpetual securities among all developers at 44.5 billion yuan (HK$55.9 billion), followed by Guangzhou R&F at 15.6 billion yuan, Agile at 4.5 billion yuan, Greentown China at three billion yuan, Kaisa at one billion yuan and Fantasia at 700 million yuan. If perpetual bonds are counted as debts instead of equity, the net gearing ratio of Evergrande will rise above 100%, instead of the 89.6%.
Posted on: Thu, 28 Aug 2014 07:30:42 +0000
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