Higher yields also mean higher risks

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As much as I like to be positive about the Greater KL property market, we must still be wary of world happenings too. It’s uncommon for companies to use up all their cash reserves for operating expenses. The reason is because cash reserves enable the companies to have opportunities to take up sudden available opportunities, for example an acquisition of a strategic company. However, for the usual operating expenses, the company may choose to borrow instead because the cost of funds is usually low enough. For example, single digit interest rates. What happens when companies wish to borrow but the lenders are less willing? The borrowers would offer to pay higher rates to the lenders.

Article in TheStar.com.my here.  It says that there are now developers which are paying double digit rates for bonds. For example, Chinese property developer Times China Holdings offered a yield of 11 percent on a two-year bond recently. This tells us about the drastically higher cost of financing for Chinese developers, which are being squeezed by rising U.S. interest rates, growing investor aversion to risk taking and China’s cooling property market. Evergrande Group also sold an additional $1 billion of two-year bonds at 11 percent. Developer Agile Group sold a three-year bond in July at a yield of 8.5 percent, but last week paid 9.5 percent for $400 million in two-year bonds, rated BB by S&P. Greenland sold a 1.5-year $200 million bond at a yield of 9.25 percent on Monday. The article says that only 15 companies across Asia-Pacific have paid double-digit rates for bonds of at least $100 million with similar tenors in the past two years, according to Refinitiv data. Twelve of those are Chinese property developers. Full article for reference here.

What this tells us is that a slowing property market meant that sales numbers are slower to come by and thus, developers cashflow may be affected. In fact, it may also meant that developers are spending more marketing dollars. Of course there’s also that possibility that some companies may have expanded way too fast in the last few years in anticipating of a huge demand. That demand did not arrive, yet. As for the lenders, it’s a fact that the higher risks that they feel they are taking on, then the yields would have to be higher, else they are not willing to lend. At the moment, these situations have yet to show up in Malaysia. Let’s hope it stays that way until the sentiment turns positive. Happy following.

written on 20 Nov 2018

Next suggested article:  IMF’s warning: Risk of a sharp tightening

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