Future Land Development bond prices tumbled on Monday after the Chinese property developer said its chairman and controlling shareholder, Wang Zhenhua, was being investigated by the country's authorities.
With investors increasingly on alert as Beijing's anti-corruption probe broadens out, Future Land's 2019 bonds sank more than 10 points to 98.653, sending yields surging to 10.722% in late Asian trade from Friday's close of 7.358%, according to data compiled by Bloomberg.
The Jiangsu-based company’s outstanding 2017 and 2018 also took a hit, while its share price ended down 4% in Hong Kong once trading resumed following Friday's suspension. The shares fell by as much as 14% at one point in Asian morning trade, the biggest one-day drop since July.
In a statement to the Hong Kong Stock exchange on Friday, Future Land said its chairman was being investigated by the Commission on Discipline Inspection of Changzhou city’s Wujin district. The filing gave few details but said the matter under investigation was personal and unrelated to company activities.
It is unclear whether Wang, who has not been accused of any wrongdoing, is assisting the regulator because of corruption, market manipulation, or something else. It is also not unusual in China for property company executives to assist in an investigation and subsequently be released without charge.
Two institutional investors told FinanceAsia that the sharp drop in Future Land’s bond prices highlights growing market fears of a new phase in corporate China's relations with the Chinese government. But they added that it wouldn’t increase the risk of bankruptcies or bond defaults in Future Land Development as their ability to offload inventory remains sound.
“I think the company has done a lot to soothe investors soon after it said the chairman was being probed by the mainland authorities,” said one of them, a Hong Kong-based fixed-income fund manager, who requested anonymity because he is not authorised to speak to the press.
According to the fund manager, the company has held at least three conference calls with investors since news broke of the investigation.
Future Land has said that it does not expect the investigation to have any impact on its financial position and that its operations remain normal. In a seperate filing, the company said it received Rmb15 billion ($2.28 billion)-worth of credit facilities from two mainland banks, lifting its total credit line to Rmb38.8 billion.
However, rating agency Moody's said on Monday that it has changed its outlook for Future Land to negative from stable, citing uncertainty over the company's operations and funding support as a result of the investigation.
The company's bonds are rated B1/B+ by Moody's and Standard & Poor's.
Graft probe
China's widening anti-corruption probe adds an extra, thin veneer of anxiety to nagging investor worries that defaults in China could yet pick up as the economy slows, leaving the country's debt-fuelled property sector on shakier ground. Global investors bought more than $21 billion of Chinese property credits, which are mostly junk-rated and subject to higher default risk.
Kaisa Group became the first mainland Chinese developer to default on its US-dollar debt last April, after its chairman Kwok Ying Shing unexpectedly resigned on December 10 2014 after a block was placed on sales in Shenzhen.
Meanwhile, Agile Property Holdings's chairman, Chen Zhuolin, was put under house arrest in October 2014 after China’s anti-graft watchdog found evidence of bribery by Agile and some officials in the provincial capital of Kunming. The chairman of the Guangzhou-based developer was released from custody after being detained for two months, the company said in a filing. Chen himself was not accused of any wrongdoing.
Whether the investigation into Wang unfolds as it did with Agile or follows the same path as Kaisa is yet to be seen. For Chuanyi Zhou, a credit analyst at Lucror, though, the former currently looks most likely, with Wang helping a probe into corrupt local officials.
Zhou said the chairman of Future Land is "cooperating", so it is unlikely that its properties will be affected or spur market-wide concerns as Kaisa did.
“Investors are getting more used to news about Chinese regulators to investigate companies that might be engulfed in grafts,” said a second institutional investor based in Hong Kong. “Investigation into bribery in the property sector will be ongoing and more companies might fall into such circumstances.”
“I’m not at all surprised by any of these kind of investigation as Future Land’s latest incident cannot be dismissed as a one-off,” he said.
