NEW YORK (The Deal) -- The holders of about $250 billion of dollar-denominated bonds issued on behalf of Chinese companies through overseas subsidiaries are a risk-loving bunch. The attraction of the Chinese companies' dollar bonds may look unsurprising. "The yield is relatively high," said Kenny Wu, a Hong Kong-based credit analyst at Citigroup (C). Yet yields of close to 8%, and occasionally as high as 12% or more, often go hand in hand with poor corporate governance, unpredictable risks, and instruments that lack both the upside of equities and the levels of protection normally afforded to debt.
Chinese property companies in particular led the charge in issuing offshore debt. Faced with huge upfront capital requirements for construction projects and suffering from tighter domestic bank lending and accustomed (until recently) to rapidly rising property prices, they proved willing issuers with no shortage of takers. Investors enticed by high yields and emboldened by an implicit state guarantee readily snapped up the dollar bonds. But they're now discovering that the guarantee may be a mirage just as both business and political risk has shifted against them.
Among the daredevils willing to trade high returns for high risk, special mention must go to the owners of Kaisa Group Holdings' roughly $2.5 billion of dollar-denominated bonds. Kaisa, a Shenzhen-based property developer, has been buffeted by almost every misfortune that could befall a Chinese company. It already holds the dubious honor of being the first Chinese company to default on its offshore loans. Yet, at the end of May, just over a month after Kaisa's default, the owners of its offshore bonds chose risk over security once again when they jettisoned a $1.17 billion takeover of Kaisa by rival Sunac China Holdings.
Sunac blamed the bid's collapse on Kaisa's failure to achieve "certain conditions precedent" to a deal. The would-be buyer, another property developer, didn't elaborate on the failures, but offshore creditors' refusal to accept a debt restructuring linked to the deal was undoubtedly chief among them.
A committee of offshore bondholders, which included BFAM Partners Hong Kong, Claren Road Asset Management and Harvest Global Investments, rejected Sunac's proposal in March, judging that they could do better than the 60 cents on the dollar they were offered. They were right. Sunac, according to bond analysts, eventually offered them as much as 73 cents. Reports suggested that a majority of the eight-member offshore bondholders' committee was ready to accept the improved offer, but others once again balked at the haircut.
The courage of that decision is reflected by quick look at Kaisa's finances. The company had cash at the start of March of 1.9 billion renminbi ($306 million), of which only 566 million renminbi-- or little over a quarter -- was unrestricted. Its total debt at the end of 2014 was 65 billion renminbi, of which 28 billion renminbi is already the subject of creditor demands for immediate repayment.
More worrying still for offshore bondholders: accounting firm Deloitte Touche Tohmatsu warned in March that they should expect to recoup only 2.4% of their investment if Kaisa fails.