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Tuesday, March 19, 2024

Friday Failure – Kaisa Bond Default Underlines China Housing Crash

What is Kaisa?

Kaisa Holdings is #1638 on the Hong Kong Stock Exchange and is currently trading at 50% of it's 2014 price at $1.50 per share.  That may make it seem unimportant but, in the Wacky World of Chinese Stocks – it's an $1Bn+ company.  Kaisa specializes in large-scale real estate projects and has borrowed $10.5Bn for various projects but, unfortunately, just went into default for lack of $52M as it also delayed the release of 2014 financials

Already the company's $800M worth of 8.875% 2018 bonds have dropped to 55 cents on the Dollar and 2020 notes are no fetching just 29.9% of face value and that's going to look generous as this situation rapidly spirals out of control.  It is estimated that, in a full default, Kaisa's bond-holders can expect about 2 cents on the Dollar because the company has generated no real value for them after spending $10.5Bn of other people's money.  

Kaisa last month postponed its results announcement for 2014, saying that auditors needed more time to verify its accounts. There may be a “significant adjustment” to the figures, the company said on March 31 without saying when the results would be released.

The earnings and profitability of some Chinese property developers may deteriorate further in 2015 and more defaults can’t be ruled out, S&P said in a report Friday. It said developers’ annual results for 2014 indicate many are in “significantly worse” shape than the previous year.

If you are an investor in Chinese notes or Chinese stocks, consider this a warning.  I will remind you that these are slow-rolling crises that take quite a long time (in the timeframe of the average investor) to unwind.  Well, maybe not so slow as this morning Glorious Property Holdings, who just had their debt cut to Ca (junky junk) is struggling to come up with $19.5M of the $300M it must provide on 13% notes due Oct 25th.  Since the end of last year, the company also failed to meet repayment deadlines on $83M of principal and $66 in interest on unspecified borrowings this year  

“Glorious is currently the most likely to default among Chinese developers with dollar bonds outstanding,” said Rui Guo, a credit analyst at Mitsubishi UFJ Securities HK Ltd. “The series of overdue debt payments reflects the very weak cash flow and liquidity profile and heightened default risk of Glorious, which are worsened by the sharp losses incurred by the company.”

Their just-released 2014 Annual Report shows $500M in losses vs $500M in claimed profits in 2013, sales at Glorious have been declining in the past three years and gross profit turned negative for the first time last year since its initial public offering in 2009, Bloomberg-compiled data show.  Compared to Kaisa, we don’t think Glorious’s current situation is much better off, since the company has been experiencing operation deterioration from 2012,” according to Kenny Wu, a credit analyst at Citigroup Inc.

I don't want to be overly dramatic about this stuff (and we are short on both China and Japan through FXI ($51.85) and EWJ ($13.26) as well as short the US markets as full disclosure) but I'm not going to let my people go through what people went through in 2008 if I can help it.  If you remember, it was a very slow roll to collapse while the markets made record highs in 2007/8 as well:

Now, reading all this in retrospect – it seems pretty obvious you should have cashed out in 2007 while the market was high but there were obvious signs of trouble, right?  But what actually happened?  Well, people have great gains and they decide to ride out a little 10% correction and, in fact, jump in "Buy the F'ing Dips" because it was working for the last 5 years (we rallied off 815 in 2002).

Then the market drops 10% more and now you are behind on your new purchases and just over even on your old ones but the Government is dumping money in and the Fed is dropping rates so things are going to be great so you stay in and then the market drops 10% more and 10% more and now you get religious because you BELIEVE it will all come back…

My theory (and we're mainly in CASH!!! at the moment) is that we're not going to miss much if we wait for the Nasdaq to hold 5,000 for a week or two while the other indexes catch up and confirm the next leg of the rally.  As I've mentioned, we still have our materials stocks and, if we're really in a huge Global Recovery – then they should do very well (and our Long-Term Portfolio just cracked +50% yesterday).

On the other hand, if I'm right and we shouldn't be ignoring these little warning signs in other parts of the World – then we can save ourselves a World of heartache AND be ready to buy the real dip when it comes (and we've found half a dozen bullish plays this week alone as earnings season gives us bargains).  Either way, I know I'm sleeping very well at night!  

Have a great weekend,

– Phil

 

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