Advanced Theory & Practice of Bonds

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1-2 December 2021

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Kaisa was downgraded to CCC+ from B with a negative outlook by S&P on diminishing liquidity and elevated refinancing risk. Kaisa has about $3.2bn in principal of offshore bonds due by October 2022. S&P estimates its liquidity sources to be less than 1x its uses over the next 12 months and hence Kaisa will have to rely on asset disposals and successfully improving its capital structure to avoid a default. Out of their RMB 40bn($bn) unrestricted cash end-June 2021, only 30-40% of it can be readily used for deft servicing as the rest is trapped at project levels. Tight operating cash flows and low visibility on asset sales add to the headwinds while its expected reduced spending on land purchases may only be a short-term solution as it can deplete land reserves.

Separately, Kaisa missed payments on wealth management products (WMPs) it guaranteed saying it faced “unprecedented pressure on its liquidity”. It said it will work out a repayment plan soon. Kaisa’s dollar bonds are now trading around 30 cents on the dollar while its 10.875% Perp is at 22.9. Kaisa’s dollar bonds are now trading at around 30 cents on the dollar while its 10.875% Perp is at 22.9, down from 50-60 levels in early October.

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Yuzhou was downgraded to B from B+ with a negative outlook by Fitch. The downgrade comes on the back of its weakened funding access and rising liquidity pressure due to sizable short-term maturities. Onshore and offshore capital market debt as a percentage of its total borrowings are at 15% and 53% respectively. While Yuzhou has the ability to pay its near-term maturities, its liquidity may tighten especially as contracted sales plunged 19% YoY in Q3. Its  unsold attributable land bank which is already lower than the industry average can weaken its business profile. While its leverage is rising, Fitch expects it to be manageable and decrease slightly to 35% in 2021 from 39-41% in 2019-2020.

Yuzhou’s dollar bonds are lower – its bonds due 2022 are ~55 cents on the dollar, its 2023s and 2024s are at ~40 cents, while its 2025s and 2026s are around 35 cents on the dollar. Its 5.375% Perps are at 34.7 cents on the dollar. The bonds were trading at the mid 70’s in September 2021.

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China Aoyuan was downgraded to B+ from BB with a negative outlook by Fitch due to decreasing financial flexibility amid high capital-market volatility. Fitch believes the capital market is largely inaccessible to Aoyuan due to which the developer will have to utilize cash flows to repay upcoming maturities.  “Its cash/short-term debt of just above 1x may be insufficient to buffer against the current volatile environment”, Fitch said. Aoyuan has RMB 8.8bn ($1.4bn) debt maturing/puttable through to end-2022, including a $688mn bond due January 2022 and $200mn bond puttable in June 2022. Available cash stood at RMB 51.7bn ($8.1bn) with 40% at the Holdco level. Its leverage was at 54% in 1H2021, higher than BB and some B+ peers. Aoyuan also has a low implied cash collection ratio of 35% due to JV projects which are not fully reflected in its financials, Fitch added.

Aoyuan’s dollar bonds are lower – its bonds due 2022 are over 40 cents on the dollar, its 2023s are at ~36 cents, while its 2024s, 2025s, 2026s and 2027s are just over 30 cents on the dollar. Aoyuan’s bonds were trading in the 70’s in early October 2021.

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