21 July 2018
Kaisa put artificial reefs, together with a notice board, under the sea close to a Shenzhen property project. Photo: Kaisa Group
Kaisa put artificial reefs, together with a notice board, under the sea close to a Shenzhen property project. Photo: Kaisa Group

Default risk can pose opportunity for bond investors

There are two major risks when investing in bonds.

First, market risk, which means any interest rate changes will affect bond prices.

Second, credit risk. If the issuer goes bankrupt or shuts down, investors will lose all the principal.

Kaisa Group Holdings Ltd. (01638.HK), a mainland property developer, issued four tranches of US dollar bonds to raise cheap funds.

The coupon rates range from 8.875 percent to 12.875 percent, with maturity dates in 2017, 2018, 2019 and 2020.

The bonds were trading above par value before the firm nearly defaulted on an interest payment this month.

However, Kaisa has been mired in rumors that its projects in Shenzhen, where the company is headquartered, have been locked up by local authorities.

And several top company officials have resigned, which triggered a suspension of trading in its stock.

The firm’s shareholders and bondholders have very limited information on what is happening, and they could lose their entire investment at any time.

Offshore bondholders face the highest risk, given that the developer has various assets like land and built property to pay back onshore investors. In most cases, offshore investors are usually in a poor position to secure any remaining onshore assets.

The price of Kaisa’s bonds plunged to a low of about 31 percent of their par value.

The biggest issue now is how to deal with the potential default or credit risk.

A veteran investor who has targeted offshore bonds issued by mainland developers has bought a portfolio of bonds issued by a dozen mainland developers to diversify his risk.

He increased his holding of Kaisa bonds when they were priced at 40-50 percent of their par value but found very few offers to sell in the market.

The investor made a careful calculation of the size of Kaisa’s land bank using prices at auctions after its listing.

He reckoned the firm’s assets should cover at least 30 percent of its debt. So he decided to buy more of its bonds after weighing his holding power.

He is happy to see that the price of the bonds jumped to 70-80 percent of their par value recently. Of course, luck also played a role in this investment.

This article appeared in the Hong Kong Economic Journal on Feb. 12.

Translation by Julie Zhu

–Contact us at [email protected] 


head of private banking and trust services at Hang Seng Bank

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