Text size

Liquidity solutions for a real estate debt crisis

Listen to article

This is a sponsored article from Equities First Holdings.

Structural problems in China’s real estate sector have drawn comparisons with the collapse of Lehman Brothers in 2008. As many private banks back away from the sector, investors can consider alternative sources of liquidity as a way to monetise their China property shares without sacrificing long-term potential.

Markets have always reacted badly to uncertainty, and a lack of clarity has affected shareholders in Chinese real estate developers in recent months as China Evergrande – the world’s most indebted property developer – led the sector into a mounting liquidity crisis.

Evergrande’s Hong Kong-listed shares have corrected by more than 80% so far this year as it struggles to avoid collapsing under more than US$300 billion of liabilities, including over US$20 billion of US dollar bonds. Uncertainty over Evergrande’s future, and the response from policymakers, is causing a knock-on effect for the real estate sector as capital markets slow down, suppliers tighten payment terms and buyers stay sidelined.

Residential property sales have declined and China’s property market faces an oversupply of unsold units. This dynamic caused new home prices to fall for the first time in six years in September 2021. Without enough money coming in to service heavy debt burdens, a growing number of issuers have defaulted. Combined with uncertainty about government support for the sector, developers’ stock and bond prices fell in October and early November.

Trading suspensions present another challenge for equity holders. As of 11 October, trading in 15 Hong Kong-listed real estate companies was suspended – locking in shareholders indefinitely. Shares in Fantasia Holdings Group, which missed a bond payment on 4 October, resumed trading on 10 November after a trading halt of over a month, and promptly lost more than 50% of their value.

Reluctant lenders

All this is making traditional liquidity providers reluctant to lend against shares in Chinese property companies. Many private banks have increased their interest rates for collateralised loans, or are unable to provide them at all. Some have reportedly stopped lending against bonds from developers seen as most at-risk, leading to painful margin calls and forced liquidations if clients are unable to top up the collateral.

Faced with such extreme uncertainty over the value – and in some cases the liquidity – of these equity holdings, what options are there available for investors?

Alternative liquidity providers like EquitiesFirst are part of the solution. Rather than crystalising losses by selling shares in a depressed market, a sale and repurchase agreement with EquitiesFirst enables shareholders to release liquidity from their portfolio while retaining upside potential.

“Nobody wants to sell at the bottom, but investors can consider other ways of using their shares to access liquidity when it is needed,” explained Gordon Crosbie-Walsh, EquitiesFirst’s Asia CEO. “At times of such uncertainty, there is a compelling argument for raising money to diversify into other assets.”

Investors who go down this route need to be confident that they are choosing the right counterparty. EquitiesFirst relies on due diligence on both the borrower and the underlying collateral before entering into any agreement, and has a track record of returning shares at the end of the agreed term.

Equity financing from EquitiesFirst comes at attractive interest rates and loan-to-value ratios, and offers investors complete flexibility over how they use the proceeds. Because the loans are non-recourse, the maximum loss a borrower can incur is the value of the shares they have pledged.

Major shareholders can also take comfort that such a deal has neutral impact on their company. An analysis of share-backed financings in Hong Kong has shown that companies whose stock was pledged actually outperformed the market after the deals were disclosed.

Fabled investor Warren Buffet once said that investors should not buy any asset they would not be prepared to hold for 10 years. The uncertainty surrounding the Chinese property sector is undoubtedly testing that maxim for many, but investors who continue to see long-term value in their holdings need not let their near-term liquidity get in the way.

1 China’s Falling Home Prices Cast Another Shadow Over Economy
2 Credit Suisse, UBS Curb Margin Funding for China Property Bonds

This is a sponsored article from Equities First Holdings.

Equities First Holdings Hong Kong Limited (“EFH”) is licensed in Hong Kong as a money lender under the Money Lenders Ordinance (Money Lender’s Licence No. 1839/2020) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (CE No. BFJ407). EquitiesFirst (“EquitiesFirst” refers to Equities First Holdings LLC (“EFH LLC”), and all subsidiaries of such company in all countries where they are engaged in business activities of any nature). This document is prepared by EquitiesFirst. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by EquitiesFirst. It aims to provide general information on the EFH loan facility which is not authorized for retail use in Hong Kong and is only available for Professional Investors. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. The information contained herein may be incomplete or incomprehensive. Accordingly, the information is qualified in its entirety by the terms applicable to the facility as set out in its constitutive documents (Loan Documents) and should be read together with such Loan Documents. This presentation has been prepared without consideration of the investment objectives, financial situation, or particular needs of any individual investor. You should consider your own investment objectives, financial situation, and particular needs before taking any action with respect to a financial product referred to in this presentation. In preparing this presentation, EFH is assuming your organization is capable of evaluating the merits and risks of any financial transaction described herein and its suitability for your organization’s purposes and its legal, taxation, accounting, and financial implications and that in making this evaluation you are not reliant on any recommendation or statements made by EFH. Before entering into any transaction EFH strongly encourages you to independently assess these things and fully understand the transaction in its entirety. EFH does not act as an adviser in any capacity and strongly recommends all borrowers seek independent advisement when assessing the transaction and its suitability. To the extent it is permitted by applicable law, EquitiesFirst, its affiliates, and any officer or employee of EquitiesFirst or its affiliates do not accept any liability whatsoever for any direct or consequential loss arising from the use of this presentation or its contents, including for negligence. Trading in equities, futures, options, commodities, currencies, or derivatives can have risks and is not appropriate for all persons. Under some market conditions, it may be impossible to liquidate a position. Copyright protections exist in this presentation. The contents of this presentation are strictly confidential and may not be disclosed, reproduced, distributed, or published by any person for any purpose without the expressed written consent of EFH, LLC. EFH makes no guarantee, representation, or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of EquitiesFirst only and are subject to changes without notice. Further information is available upon request.

Related Tags