Country Garden's sukuk a 'tough sell'

An artist's drawing of Country Garden's Forest City project in Johor.
An artist's drawing of Country Garden's Forest City project in Johor.PHOTO: COUNTRY GARDEN PACIFICVIEW

Chinese developer's plans for Islamic bond beset by concerns over property glut in Malaysia, earlier default of rival property player

KUALA LUMPUR • A debut Islamic bond by a Chinese issuer in Malaysia looks set to be clouded by concerns about oversupply of property in both countries.

Country Garden Holdings, majority-owned by billionaire Yang Huiyan, plans a sukuk programme of at least RM1 billion (S$327 million) to finance an integrated resort project in Johor, the worst hit by Malaysia's biggest supply glut in 10 years.

The offering comes after rival Hong Kong-listed property developer Kaisa Group Holdings defaulted on its debt earlier this year.

"It's a tough time for property companies to convince investors to take a credit risk," said Mr James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Asia. "Kaisa's default would also have a collateral effect on Country Garden. The fact that Country Garden is building a project in Johor, where the take-up rate is low, also won't help."

Country Garden's project at Danga Bay is part of Johor's plans to compete with Singapore to become a business and residential hub. The sale will also test investor appetite amid a slump in the Malaysian ringgit, slowing economic growth in China and an exit from emerging market assets.

The real estate firm purchased a 22-ha plot in the state's waterfront area and its resort is estimated at a gross development value of RM18 billion, its website said.

The company plans to sell up to RM800 million from the sukuk programme next month and has set the initial yield target at about 6 per cent, according to debt analysis firm CreditSights.

The yield on Country Garden's 7.5 per cent conventional dollar notes due in 2020 was at 6.61 per cent on Wednesday, having dropped 74 basis points since March, data compiled by Bloomberg shows.

Country Garden is 54 per cent controlled by Ms Yang, who is China's second-richest woman with estimated assets of US$4 billion (S$5.6 billion), according to the Bloomberg Billionaires Index. The remaining shares are held by institutional and retail investors, including JPMorgan Chase, Blackrock and Eastspring Investments.

China's third- and fourth-tier cities, where 48 per cent of Country Garden's sales comes from, still face a property glut as new home prices extended declines in July, an Aug 18 statement from the National Bureau of Statistics shows. 

The South-east Asian nation's record Islamic banking assets and a shortage of sukuk will ensure Country Garden's bonds will attract demand, said Kuala Lumpur-based AmInvestment Bank.

"While market conditions may be challenging, Country Garden should be able to attract buyers, given the scarcity this year," said Mr Mohd Effendi Abdullah, head of Islamic markets at AmInvestment, this year's fourth-biggest sukuk arranger. "The pension funds and insurance firms are also cash-rich."

Chinese companies are facing higher dollar-funding costs after last month's surprise devaluation of the yuan and a looming interest rate increase in the US.

Kaisa Group became the first Chinese builder to default on its debt in April and is nearing agreements with domestic creditors, while international investors may not recover all their money.

Country Garden has US$3.2 billion of debt outstanding, data compiled by Bloomberg shows.

"We reckon funding local projects with local currency would be helpful to minimise forex risk," said Country Garden deputy financial controller Berylla Ying Zuo in the Chinese city of Guangdong.

As the world's biggest Islamic debt market, Malaysia has attracted companies from the Middle East, Europe and Asia. HSBC Holdings, the Islamic Development Bank, Singapore's Noble Group and Bahrain's Mumtalakat Holdings are among those that have sold ringgit syariah-compliant debt.

"Given the challenges and uncertainties in the Chinese economy, we will be cautious to consider this investment," said chief investment officer Norlia Mat Yusof at Kuala Lumpur-based Etiqa Insurance & Takaful, a unit of Malaysia's biggest lender. "Asset managers who manage funds with China or have emerging market mandates are likely to look at the offering."


A version of this article appeared in the print edition of The Straits Times on September 11, 2015, with the headline 'Country Garden's sukuk a 'tough sell''. Print Edition | Subscribe