Developers’ Asset-Backed Securities Come Under Scrutiny

A number of asset-backed securities (ABS) issuances have recently been suspended or terminated. Affected companies include Poly Property, Landsea Group, and Baidu, with the issuances totaling to about ¥5.4 billion. All of the funding is said to have been for long-term rental housing ventures, and projects to support shantytown development.

On July 11th, Xinyuan Holding’s ¥1 billion ABS was suspended. One day later, on July 12th, Landsea Group’s ¥787 million rental apartment ABS was suspended, while Poly’s ¥1.5 billion “Everbright-Guosheng-Poly ABS” was terminated. On July 6th, a ¥346 million rental housing ABS backed by Baidu and Huatai was suspended. At the same time, the Shanghai Stock Exchange approved a ¥10 billion ABS by China Evergrande on July 5th.

The change in ABS policy has come as a shock to many analysts, as projects in these sectors were previously seen as government priorities. Fears are also rising that cash-starved developers will be faced with further limitations in terms of possible financing avenues.

Some industry insiders believe that the change is due to concerns about rising debt among major players in the market. Average rental yields are just 3%, while borrowing costs via an ABS may be as much as 6%. Some companies are also believed to have falsely issued ABS under the pretense of developing a rental housing project, while actually intending to divert funds towards other projects.

China’s National Development & Reform Commission (NDRC) is also considering closing a loophole that currently allows companies to issue bonds that will mature in one year without approval.