Unforced error

In case anyone was in any doubt, Country Garden Holdings’ failed attempt to launch a convertible bond last week showed that Chinese property companies shouldn’t haggle too hard on pricing right now.

Country Garden is one of the strongest private sector credits in China’s property sector, with crossover ratings. In years gone by, it was known to pull bond deals over a matter of 10 or 20 basis points, which was standard practice at the time.

By insisting on a yield of 4.75% over the 5%–6% market sources reckoned was needed to clear the deal, the company stood to save up to US$4m in interest per year. It might have made sense to drive a hard bargain in a bull market, but US$4m is a drop in the ocean for a company that paid US$1.5bn in interest expenses for the first six months of last year.

In a market where investors are looking for signs of weakness, allowing a potential fundraising to fall through looks distinctly ill-advised. Country Garden’s shares fell 7.8% and its bond yield widened 200bp as investors learned that the deal had failed to gain enough traction to launch.

Fundraising is a treacherous task for Chinese developers these days, even when they get it right.

Sunac China Holdings saw its shares plunge 22.6% – not because it failed to agree on a fundraising, but because it came back to the equity market just two months after its last placement.

Traders ignored the strong response to the deal and wondered if selling shares at a double-digit discount was a sign of desperation, rather than simply the clearing price in a fragile market.

Since Shimao Group Holdings found itself in the headlines this month, it feels like any name in China’s property sector could be under stress.

The developer, which was rated investment grade as recently as November, has managed to shoot down some of the claims against it and bought itself breathing room by negotiating a loan extension. Twitchy traders seem to have moved onto the next target.

There will be plenty of negative headlines to come from the Chinese property sector. There’s no need for developers to create new ones by trying to execute deals at pricing that doesn’t match market realities.

They should establish their access to funding, then worry about improving the pricing terms when the crisis has passed.