Chinese developers turn to securities after regulators clamp down on bonds

Companies use receivables from future sales as a source of financing
November 25, 2017 11:00AM

China Vanke’s Yu Liang (Credit: Getty Images)

Chinese developers are increasingly selling securities backed by future real estate sales as a source of financing after regulators stymied their ability to sell corporate bonds.

Research firm China Securities Research said issuance of such securities tripled during the first seven months of the year over the same time in 2016, Reuters reported.

More than 11 Chinese developers – including China Vanke, Greentown China Holdings and the state-owned Beijing Capital Land – have either issued or announced plans to issue the securities this year, up from six developers last year, according to Reuters.

Chinese regulators clamped down companies’ ability to sell on-shore corporate bonds late last year as a way to cool the overheated real estate market.

Developers are finding a fledgling market for securitized receivables, which are backed by revenues recorded on their books by contracts that typically close 12 to 24 months later. Rates are about 5 to 7 percent – which is just a bit higher than the rates on corporate bonds – and the securities typically have a maturity of 2 to 4 years.

China’s mortgage risk is generally low, because borrowers are personally liable for debts. But if there’s a downturn in the real estate market, defaults could increase, and as the securities market grows, lower-quality issuers could jump in.

“Now that regulation is strict, defaults won’t happen,” said Joe Zhou, head of research at JLL in China, noting that assets and products are generally high quality. “But in the future, if some assets are problematic and issuers still package them for financing, then defaults could happen.” [Reuters] Rich Bockmann