Abstract
During the global financial tsunami, banks were very cautious in financing business needs due to tight credit conditions. Alternative ways for financing projects were sought after by real estate developers worldwide. Within Asia, notably in Hong Kong SAR and Singapore, a number of reputable property developers have been tapping the capital debt market for funds in recent years amidst an increasingly regulated loan market and competitive pricing. In the face of a growing bond market, some corporate bond issues arranged by these property developers have been successful. Apart from investment appetite, property developers have to gauge carefully the pros and cons of raising funds through bond issues. Successful bond issues need to be structured with suitable credit enhancement features since the perception of risk and rising interest rates are major deterrents to potential investors who would otherwise face bond defaults or bear high opportunity costs with the committed funds. Through a number of case studies, the suitability of bond financing for property development is compared with loan financing. It is found that a close monitoring of market conditions and some foresight are essential ingredients for successful bond financing, for both straight bond issues and convertibles. Santrauka Siaučiant pasauliniam finansų cunamiui, dėl griežtų kreditavimo sąlygų bankai verslo poreikius finansavo labai atsargiai. Visame pasaulyje NT vystytojai ieškojo alternatyvių būdų, kaip finansuoti projektus. Pastaraisiais metais, kai paskolų rinka buvo vis labiau reguliuojama, o kainos konkurencingos, ne vienas gerbiamas NT vystytojas Azijoje, ypač Honkongo specialiajame administraciniame regione ir Singapūre, lėšų ieškojo kapitalo (obligacijų) rinkoje. Obligacijų rinkai augant, kai kurios tokių NT vystytojų išleistos įmonių obligacijų emisijos buvo sėkmingos. NT vystytojams reikia atidžiai įvertinti ne tik investicijų poreikį, bet ir visus lėšų rinkimo leidžiant obligacijas ,,už“ ir ,,prieš“. Idant obligacijų emisija būtų sėkminga, ją formuojant būtina deramai sustiprinti kreditą, nes tikėtina rizika ir augančios palūkanos yra pagrindiniai aspektai, kurie atbaido potencialius investuotojus, nes kitaip jiems tektų nemokios obligacijos arba didelės patikėtų lėšų alternatyviosios sąnaudos. Atliekant kelis atvejo tyrimus NT statybų finansavimo obligacijomis tinkamumas lyginamas su finansavimu paskolomis. Nustatyta, kad atidus rinkos sąlygų stebėjimas ir įžvalgumas yra būtini komponentai sėkmingam finansavimui obligacijomis išleidžiant tiek paprastųjų, tiek konvertuojamųjų obligacijų emisijas.
Highlights
The Asian financial crisis in the mid-90s has seen banks incurring substantial bad debts due to an over-reliance on loans to fund projects and stumbling property prices affecting borrowers’ repayment capability
The following case studies track the use of bond financing in the real estate sector of Hong Kong and Singapore by several major property developers and their subsidiaries for their corporate financing, through a study of public domain data, including those published in the Basis Point and companies’ annual reports
As shown through a series of case studies in this paper, fixed rate bonds may cost more than bank loans at times, but developers may still use them to broaden funding channels (Case A and C)
Summary
The Asian financial crisis in the mid-90s has seen banks incurring substantial bad debts due to an over-reliance on loans to fund projects and stumbling property prices affecting borrowers’ repayment capability. The bigger developers enjoy a plethora of funding sources due to their stronger balance sheets and good credit ratings They can tap the capital market for share and bond issues, whilst smaller developers can only resort to private equity and bank loans. For two years after the financial meltdown caused by the US sub-prime crisis, the impacts on developers of all sizes linger even when the economy is recovering, with loan cost being higher than pre-tsunami levels and liquidity limited to core business relationships (Basis Point, 2009). It was only starting from March 2010 that loan pricing has returned to pre-crisis level (Basis Point, 2010). This study is timely as Liow (2008) pointed out that market interdependence is a rising trend after the Asian Financial Crisis, due to the growing interconnections between national economies
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