Chinese developer firm Kaisa plans to swap $400 million of dollar notes

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Chinese developer firm Kaisa plans to swap $400 million of dollar notes

One of the market's largest issuers announced this week that the debt swap will be designed to avert default, as the newfound stability in Chinese dollar bonds will be tested this week.

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Kaisa Group Holdings Ltd. s offer to exchange $400 million of dollar notes maturing December 7 for new ones due to 18 months later expires at 4 p.m. London time on Thursday. If the offer fails to win support, the struggling firm said it may not be able to repay bonds and could consider a debt restructuring.

According to a letter from a financial adviser who represents some bondholders, investors holding more than half of the notes are not willing to support the offer, according to local media outlet Jiemian.

Kaisa is China's third largest borrower of dollar bonds among property firms, with some $11.6 billion outstanding. More than 5% of developers have debt in that currency. A default could spur contagion risk, as investors return to offshore property bonds. According to Bloomberg, Chinese developers need to repay $2.1 billion in dollar bonds in December and $6.1 billion in January.

An index of Chinese dollar junk bonds is little changed for November after prices plunged 18% over the last two months. The rout began to reverse earlier this month, as the government took measures to help lower the cash crunch for higher-rated developers and companies trying to raise funds. There were no defaults by real estate firms in November, after at least four in October.

The risks of debt restructuring for the most leveraged developers have not faded, but the worst may be over, said Wei Liang Chang, a macro strategist at DBS Bank Ltd. It's likely that high-yield credit spreads will remain volatile in the short-term. China's onshore credit market has remained resilient. Spreads on China's riskier AA rated bonds have been tightened to an average of 131 basis points this month, compared to 142 basis points over October. State-owned developers have rushed to sell yuan bonds amid reports that authorities are loosening restrictions on the industry's ability to sell domestic notes.

Money managers like Allianz Global Investors and T. Rowe Price Group have taken advantage of the recent turmoil to add higher-rated developer bonds and turned positive toward China's credit market in recent weeks. The economic slowdown will prompt policymakers to scale back property tightening measures added to the buoyant mood.

The yield on Chinese junk dollar bonds is close to 20%, and the borrowing costs are exorbitant for stressed developers to tap the offshore market. Instead firms look for alternative routes - typically fire sales of assets, share placements and founders using their own funds.

Market access will be challenging for the lower-rated part of the market unless there is stronger policy support towards the sector, according to Clement Chong, head of research at NN Investment Partners. Credit selection is important in the near term because of the fact that Defaults will likely occur in the near term. China Evergrande Group agreed to sell its remaining stake in internet business HengTen Networks Group Ltd. at a loss of $8.5 billion $1.1 billion. Chairman Hui Ka Yan raised $344 million selling shares in the company last week.

Kaisa is selling a Hong Kong property project for around HK $500 million $64.1 million less than the company paid for it last year, Bloomberg reported. The firm is planning to put up 18 projects in Shenzhen for sale with a total value of $12.8 billion.

Offers to extend bonds is a way to try and avoid default. A unit of Yango Group Co. received creditor approval this month to exchange three of its dollar bonds with an outstanding value of $747 million.

According to HSBC Holdings Plc, the exchange offer of Kaisa has limited incentives for bondholders. HSBC credit analysts, including Reks Ng, wrote last week that even if successful, the plan is at best kicking the can down the road.

A default in Kaisa is inevitable in the next six months, S&P Global Ratings said this month, before downgrading the firm deeper into junk and withdrawing its rating. Many of the company's bonds are trading at around 35 cents on the dollar, or less. Kaisa defaulted on bonds in 2015 and then restructured its borrowings.

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