October 20, 2020

DealBook: As the Pace of China’s Junk Bond Sales Grows, So Do Worries

HONG KONG — It has an all-too-familiar ring. Investors in search of better interest rates rush to risky, high-yield bonds, raising worries that the market is overheated.

But the concerns — which have already been voiced about the $120 billion of European and American junk bonds issued this year — are now being applied to the fledgling Chinese market.

While American and European companies have been selling high-yield debt for decades, Chinese businesses only recently started to tap into the junk bond market in earnest.

It’s a sign that Chinese companies are growing up. As the country’s economy continues to open up, private sector businesses have looked to foreign investment to finance their expansion efforts, rather than relying on hard-to-get loans from the state-controlled banks.

The junk bond market in China took off this year. Although the deals still account for a small share of the global total, Chinese companies have sold $8 billion of high-yield bonds to overseas investors since January. That’s up from $2.3 billion during the same period a year earlier, according to figures from Dealogic.

“Bond markets are booming because companies have had difficulty getting the level of debt they want out of banks onshore or offshore, and in tapping equity markets,” said Nick Gronow, a senior managing director at FTI Consulting in Hong Kong and an expert in Chinese bankruptcies. “So bonds have really taken up the slack.”

But the pace of growth is troubling to some analysts.

As investors have plowed into junk bonds across the globe, yields have plummeted. In the United States, rates on junk bonds have dipped below 6 percent, compared with historical payouts of roughly 10 percent or more.

The trend is similar in China.

Country Garden, a builder based in the southern city of Guangzhou, raised $750 million in January by selling 10-year bonds that paid 7.5 percent a year. In 2011, the company sold $900 million of seven-year bonds at a much higher 11.125 percent.

The borrowing costs for Kaisa Group Holdings, a commercial real estate company in the southern city of Shenzhen, have also dropped rapidly. In September, it sold $250 million of five-year bonds at 12.875 percent. By January, it was able to sell $500 million of bonds at 10.25 percent. This month, it issued new bonds at 8.875 percent.

“Chinese real estate issuance is happening for structural reasons: 50 percent of the population needs to be urbanized and housed, traditional funding from banks may be more restricted now, and global appetite for yield is on the rise,” said Gregorio Saichin, the London-based head of emerging markets and high-yield, fixed-income portfolio management at Pioneer Investments. “When you combine all the above factors with a massive refinancing exercise by Chinese property developers, you get this type of outcome.”

But it’s a slim difference in yields for such disparate markets.

Chinese high-yield bonds have many of the same characteristics — and risks — as American debt. They tend to be sold by companies looking to finance ventures in new or untested areas or businesses that compete in industries where earnings are subject to volatile swings.

But the Chinese market has its own set of potential problems, and some analysts worry that investors aren’t being properly compensated for the added layer of risks.

For one, the bulk of the high-yield bonds in Asia this year — roughly half — come from Chinese real estate companies. The fear is that the housing market, which has been booming, is a bubble that will eventually burst.

The industry is especially uncertain, given the periodic government intervention. On March 1, Beijing announced new measures to curb excess in the market, including the strict enforcement of a 20 percent capital gains tax on the sale of preowned homes.

“With the new leadership in China, people are still not sure which way things will go in terms of property policies,” said Suanjin Tan, an Asia fixed-income portfolio manager based in Singapore at BlackRock. “That also adds to the desire among these guys to remain cashed up, so they can take advantage of any wobbles in the market to pick up land on the cheap.”

Chinese junk bonds also have a unique structure, which could leave investors vulnerable.

Mainland China’s domestic bond market remains largely off limits to foreign buyers. So most investors buy offshore Chinese bonds, which are issued through holding companies headquartered in places like the Cayman Islands.

The bonds tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt, especially if local banks or other Chinese creditors make claims.

Bondholders are now facing such difficulties with the bankruptcy of Suntech Power.

Earlier this month, Suntech, the world’s largest solar panel maker, stopped making payments on $541 million in convertible bonds largely held by foreign investors, including Pioneer Investments. On March 21, a court in Wuxi, a city in eastern China, accepted a bankruptcy petition filed by eight Chinese banks against Suntech’s main operating unit in China, a group that is seeking to recoup some of the money it lent to the company.

If previous Chinese bankruptcies are any indicator, those local banks will take priority in the so-called liquidation process, while foreign bondholders may lose everything. “The greatest difficulty the bondholders have, when things go wrong, is what leverage do they actually have against the company?” Mr. Gronow of FTI Consulting said.

The answer, usually, is not much. Mr. Gronow cites the case of Asia Aluminum, a manufacturer in the small southern city of Zhaoqing that collapsed in 2009 after accumulating more than $1.7 billion in debt.

After several months of often strained negotiations between the company, mainland and Hong Kong banks, foreign bondholders and the government, Mr. Gronow and his co-workers, acting as liquidators, worked out a deal that gave back Asia Aluminum’s bank creditors in Hong Kong 100 percent of their capital.

Others were not so lucky. The owners of bonds issued by one offshore subsidiary received about 20 cents on the dollar. And investors in riskier “payment-in-kind” notes, a sort of hybrid bond where interest payments can be made by selling more debt, received only about 1 cent on the dollar.

“The thing you face as a liquidator dealing with these situations is how to maximize the recovery,” Mr. Gronow said. “Clearly, getting that sort of return, they were not very happy about it.”

Article source: http://dealbook.nytimes.com/2013/03/28/as-pace-of-chinas-junk-bond-sales-grows-so-do-worries/?partner=rss&emc=rss

The 30-Minute Interview Mitchell Roschelle: The 30-Minute Interview: Mitchell Roschelle

Interview conducted and condensed by

VIVIAN MARINO

Q. Tell me a little bit about the practice.

A. The practice has about 100 professionals across the country. We’re in New York, Boston, Philadelphia, South Florida, Chicago, Los Angeles and San Francisco. There are seven partners, in addition to four managing directors, and we cover the real estate asset class from single-family residential to big office.

What we do really depends on the market needs, but it includes due diligence, financial advisory and strategic portfolio performance reviews. Our specialty is analysis. We don’t compete against the brokerage community — we don’t have any vested interest in the outcome of a transaction.

Q. What is your main role there?

A. I get involved in recruiting and retaining our people and our clients.

Q. Who are your clients?

A. It’s mostly institutional. They tend to be the big pension funds that invest in real estate or advisers to the pension funds and REITs. But I do have entrepreneurial clients. J. P. Morgan Investment Management and Starwood Capital, GE Capital, NorthStar Realty Finance and Ogden CAP Properties are examples of clients.

Q. How is business?

A. It’s very good. There are two ways of answering the question. One, the real estate asset class couldn’t be positioned better in an economy like now, so there’s a tremendous amount of capital formed to invest in real estate, which is good for our business. And then because there are some markets where prices are at prerecession levels, there are clients looking to take money off the table, so there’s selling of assets. There’s a lot of transaction activity, which is good for our practice.

What’s interesting is, if things are terrible and there are bankruptcies and disputes between parties, we do well. If things are going gangbusters like they were in ’06, we do well. The only time we’re slow is when there’s a lot of indecision in the market.

Q. Like during the recession.

A. But interestingly enough, when that went on in ’08 and ’09, valuation was a tremendous issue and valuation is a big part of our practice. Financial instruments were hard to valuate; hard real estate was a little bit easier.

Q. How would you categorize 2012?

A. Coming out of the recession the big gateway cities were the ones that performed best. That included New York, Washington, San Francisco, Boston, Chicago and Los Angeles. That’s where investors were willing to take risks. You had diverse employment base, better leased buildings, less risk of a double-dip micro recession.

So that’s where we were — and 2012 was a continuation of that.

Apartments were the darling real estate subsector. But what happened in 2012 was we saw apartment cap rates get too low in some of those markets — south of 5 percent — and so investors were looking to invest outside apartments and outside the gateway cities. We started seeing in 2012 an interest in the office asset class, the industrial asset class, and a little bit more interest in retail.

Q. Are there regions of the country where you see future growth?

A. The other 45 markets that are covered in our investors survey look like that’s where all the opportunities are — whether it be Raleigh-Durham, N.C.; Texas markets like Austin, Houston and Dallas; Seattle; and Denver.

None of them is radically overbuilt from an office or apartment perspective. What’s also interesting is those markets have a high percentage of echo boomers in their population — the 25- to 34-year-olds. That’s who’s going to buy a house in the future, who’s going to work in an office or retail or warehouse, or shop in retail.

Q. Let’s talk about your recently released 2013 Emerging Trends Survey of investors.

A. One cool thing: We asked the 900 participants what they think their prospects are for profitability for the real estate asset class, and we intentionally don’t define profitability — 93.1 percent felt that 2013 would be fair or better from a profitability perspective. That’s up almost seven or eight percentage points from last year.

There isn’t a lot of overbuilding in this country, so all of the stock that was created in the wake of the boom leading up to 2006-2007 — that’s in the process of being absorbed. Housing has turned a corner. The challenge we have in our country is in our job re-creation.

Q. Do you personally invest in real estate?

A. I have a home. That’s it.

Article source: http://www.nytimes.com/2012/12/05/realestate/commercial/the-30-minute-interview-mitchell-roschelle.html?partner=rss&emc=rss

Ford Contract Talks Intensify as Union Prepares for Strike

People briefed on the negotiations, who spoke on condition of anonymity because the talks were private, said that the parties were only beginning to discuss some of the most important issues and that top-level Ford executives had not joined the talks, indicating that no deal was imminent.

The U.A.W. told officials at Ford plants across the country over the weekend to begin forming strike committees and to distribute information to workers about a possible strike.

“At this time, there is no indication that a strike will be necessary, but it is in our best interest to prepare ourselves in the event we are forced to call for a strike,” the latest memorandum to workers said. The memo is regarded as a formality but does allow the union leverage to walk out of talks.

After taking Sunday off, union negotiators began “high-level financial discussions” with Ford on Monday, according to a memo they posted online. A subsequent memo said the parties had agreed to meet for “very long negotiating sessions” this week and that bargaining would continue around the clock when a deal was near.

Ford is the only one of the three Detroit carmakers whose workers are allowed to strike in this year’s talks. Binding arbitration is the only option at G.M. and Chrysler in the event of an impasse, under the terms of their government-sponsored bankruptcies in 2009.

Analysts say they expect Ford’s contract to generally follow the pattern set by the tentative agreement with 48,500 workers at G.M., reached Sept. 16. Voting on the G.M. deal is set to finish Wednesday.

Workers at large plants in Flint, Mich.; Arlington, Tex.; Parma, Ohio; and Spring Hill, Tenn., have voted for the deal, which would create or retain 6,400 jobs and move some work to the United States from Mexico. The Spring Hill plant, which was mostly idled in 2009, would reopen if the contract were ratified.

“For the most part, they feel like it was a good agreement,” said Michael Cartwright, the president of Local 276, which represents 2,400 workers building sport utility vehicles in Arlington. “They understand the state of the business — that things are better but not we’re totally out of the woods because of the economy.”

Workers would be guaranteed bonuses of at least $8,000 over the four years of the contract, plus larger profit-sharing checks. Adam Jonas, an analyst with Morgan Stanley, estimated in a report Monday that workers would collect a total of $40,500 in bonuses throughout the contract, based on his forecasts for G.M. profits.

The deal is receiving widespread approval from entry-level workers, who earn about half as much as longtime workers and would get raises of several dollars an hour if the contract passes. At a parts processing plant near Flint where all 450 hourly workers earn entry-level wages, 88 percent voted in favor, according to a posting by Local 651 officials on Facebook.

But the deal was rejected over the weekend at a plant near Lansing, Mich., where about 3,400 workers build crossover vehicles and few receive entry-level wages. Local 602 said on its Web site that only 34 percent of production workers and 43 percent of skilled trades workers voted yes.

Ratification of the deal would resolve some of the uncertainty that has helped drive down the value of G.M. stock. Shares fell below $20 for the first time on Friday and closed Monday at $21.08, well below the $33 public-offering price last November. By buying out highly paid skilled trades workers and replacing them with entry-level employees, G.M. can make up for the larger bonuses, Mr. Jonas, the Morgan Stanley analyst, said.

“The contract not only offers greater flexibility, it offers the potential of greater profitability for G.M.,” he wrote.

Although the union is primarily focused on reaching a deal with Ford, negotiators have continued to meet with Chrysler. Bob King, the U.A.W. president, met with Chrysler’s chief executive, Sergio Marchionne, on Friday, they said in a jointly released statement. The union and Chrysler agreed to extend their contract, which was set to expire Sept. 14, through Oct. 19.

Article source: http://feeds.nytimes.com/click.phdo?i=a4286d8e9b6a1d6967ecf5c46d9bba3a

European Union Unity? Not on Debt Collection

ZARAGOZA, SPAIN — In 2001, an agricultural co-op here was supplying truckloads of wheat to an Italian pasta maker. At first, no one at the Spanish co-op, Arento, was much alarmed when the pasta factory in Milan fell behind in its payments.

The co-op did not cut off the credit until the pasta company owed €1 million, or more than $1.4 million today, never realizing how hard it might be to collect a debt in another country in the European Union. But now, a decade later, having spent years in the courts and tens of thousands of euros on legal bills, Arento has recovered only half of what was owed.

“We came face to face with the Italian legal system,” said Luis Navarro Olivares, Arento’s director general. “The trips to Milan were Kafkaesque. Really, Italy is too far away on a cultural level, a legal level and an administrative level.”

In theory, the European Union is one gigantic economic zone of about 500 million consumers all integrated into the world’s biggest trading bloc. But the ideal is still far ahead of the reality, particularly for businesses that end up trying to collect debts across the Union’s many borders. There are still 27 different national legal systems at work in the bloc, each with its own procedures for handling claims, property attachment and bankruptcies.

European officials say at least €55 billion a year in debt is simply being written off, much of it because businesses find it too daunting to press expensive, confusing lawsuits in foreign countries.

Officials and business leaders say they believe that debt collection problems are a profound deterrent to commerce within the European Union and one of the reasons that job creation and wealth generation falls consistently behind the United States, where pursuing debts across state lines is a comparatively easy task.

With much of Europe still caught in an economic slump and several countries weighing down the bloc’s growth prospects because of huge sovereign debt problems of their own, E.U. officials are starting to circulate proposals for fixing this comparatively simple problem, in hopes of yielding a quick, cost-free stimulus to Europe’s financial health.

Debt collection is just one example of the shortcomings of a market which, for legal, linguistic and cultural issues, rarely functions as a single space. Professional qualifications in one country often are not recognized in another, for example, and local business regulations frequently make it hard for Europeans to set up shop in another E.U. country.

A more effective single market, the Union officials say, could generate €60 billion to €140 billion in additional trade — the equivalent of an additional 0.6 percent to 1.5 percent of the bloc’s gross domestic product.

But individual E.U. countries still jealously guard the right to control many regulations covering business, and to operate independent civil and commercial legal systems.

Valle García de Novales, a lawyer here in Zaragoza who specializes in international commerce, tells her clients that any debt of less than €100,000 is not even worth pursuing in court.

“You let it go because it is just too costly,” she said.

What is worse, many companies have been so discouraged that they have given up on doing business across borders. Meanwhile, fewer than 10 percent of European consumers buy anything from a Web site outside their home country.

In an effort to improve the situation, the European Commission, the bloc’s executive arm in Brussels, is working on a series of proposals to improve the single market. They include 12 priority changes to help reinvigorate the single market, from an agreement to recognize one another’s educational qualifications to an E.U.-wide system for registering patents.

This year, it is expected to propose a standardized Europe-wide system to freeze the amount of money owed to a company in the debtor’s bank account. That would prevent it from being moved to another country — often as easy as a mouse click — while providing an incentive to settle the claim quickly.

Article source: http://www.nytimes.com/2011/04/19/business/global/19debt.html?partner=rss&emc=rss