Mar 16, 2023
Value Partners Turns Away From China’s Soured Property Debt
(Bloomberg) -- An investor that profited from the aftermath of China’s first dollar bond default by a developer nearly a decade ago is turning its back on the nation’s distressed property debt, after losing more than its peers in the past two years.
Value Partners Group Ltd., which played a key role in Kaisa Group Holdings Ltd.’s debt overhaul after its bond blowup in 2015, has “little appetite” to repeat the same strategy of buying distressed credit to seek returns via restructuring amid the sector’s current downturn, Gordon Ip, the firm’s co-chief investment officer of fixed income, said in a recent interview.
“It’s the worst combo — a mixed bag of negotiating parties, and a wounded property market. Timewise, it will likely be unrealistically long and makes internal rates of return less attractive,” Ip said. “We decided to not do property restructuring probably around second half of 2022.”
The Value Partners Greater China High Yield Income Fund, which Ip manages, lost 33% in 2022, exceeding an average loss of 11% by peers, according to data compiled by Bloomberg. That followed a loss of 22% in 2021, when others gained an average 2%. The fund had assets under management of $636 million as of February, a filing shows. By way of comparison, Ip managed $5.8 billion at the same fund at one point in 2018.
Investor views have been split after record defaults and debt disputes rattled China’s property market, where a crackdown on financial risk and plunging sales caused an unprecedented cash crunch. While a recent industry rescue package and a reopening economy have rekindled bargain-hunting interest among some, there’s plenty of skepticism about any quick fix for a sector mired in a much deeper slump.
Ip’s fund was on a four-member committee that negotiated a relatively swift debt revamp for Kaisa, which was China’s first developer to default on offshore bonds.
A restructuring plan, approved by 96% of noteholders, helped produce a rally of nearly 170% in the securities. Ip, who has 29 years of experience investing across fixed-income sectors, declined to offer details about his fund’s previous investment in Kaisa.
Back in 2016, Ip estimated a historical recovery rate of at least 60% for distressed Chinese property debt. Now, he said he expects as little as zero. “The best case may not exceed 30%.”
There are notable differences with the situation now. The fact that Kaisa’s collapse to a large extent resulted from an official investigation about its links to a senior local official under a corruption probe makes it a relatively isolated case. China’s housing market was still booming at that time, laying the foundation for a rapid recovery for distressed assets.
After a harsh clampdown on leverage and three years of Covid curbs, China’s property industry is in much worse shape now. Even as Beijing’s sweeping efforts to arrest the slowdown induced a record rally in developers’ dollar bonds in recent months, signs of stress persist amid depressed housing demand.
While more distressed developers have made progress recently on debt restructurings, the processes have often been opaque in a country still relatively new to delinquencies.
Moreover, a crowded camp of creditors and less forthcoming defaulters also make the restructuring talks lengthier. To Ip, a good steering committee usually has a small number of participants with large holdings.
“There are way too many parties with different agendas in some current cases,” he said. “The talk becomes noisy, making it almost impossible to work out good terms.”
--With assistance from Kevin Kingsbury.
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