FOREIGN investors are demanding Chinese property developers provide stronger assurances about their financial positions after Kaisa Group almost defaulted on its offshore debt, despite reporting relatively healthy cash holdings.

    With China’s housing market confronting a sharp drop in sales and a growing number of unsold homes, investors are already nervous about the prospects for the country’s property developers.

    Those worries have escalated after Kaisa rattled Asia’s corporate debt markets by failing to make a timely repayment on a HK$400 million (US$51 million) loan from HSBC and being late on a US$26 million bond coupon payment.

    While a buyout offer from Sunac China means it has been rescued from the brink of becoming the first Chinese developer to default on an offshore bond, investors are puzzled as to how Kaisa’s financial position deteriorated so quickly.

    “In Kaisa’s case, the mystery was that the company was meant to have a lot of free cash and missed a small payment on the HSBC loan and the coupon,” said Geoffroy Wallier, managing partner at Orfi Capital.

    Now they are looking at ways of making extra checks on other developers’ financial positions, and calling for more timely disclosures.

    “Investors may be better protected by seeking proof of unencumbered cash via a certificate on a regular basis,” Wallier added.

    Problems at Kaisa, which has about US$2.5 billion in foreign bonds, escalated late last year after the local government in its home base of Shenzhen blocked sales at some of its projects in the city.

    That was followed by the departure of a string of senior executives, including founder chairman Kwok Ying Shing.

    Investors had initially assumed the company could resolve its debt problems fairly easily, given it had reported having 9.6 billion yuan (US$1.54 billion) in unrestricted cash June 30 last year.

    However, its continued failure to make an interest payment on a bond and a lack of disclosure as to what the root cause of its problems was, sent its bond prices on a month-long roller coaster ride.

    Jim Veneau, head of fixed income at AXA Investment Managers Asia, said the market was particularly aggrieved Kaisa only disclosed problems with its loan payment Jan. 1, when the chairman’s resignation which triggered the repayment clause was Dec. 10.

    “The company blindsided the market,” he said.

    Kaisa’s problems meant Chinese developers, who have become increasingly reliant on the international debt market for funding in recent years, could not issue any high yield bonds during January.

    Developers accounted for 61 percent of all high-yield bonds issued by Asian companies, excluding Japan and Australia, in the U.S. dollar market in 2014, according to Thomson Reuters data.

    Ratings agencies Standard & Poor’s and Moody’s have both warned that Kaisa’s woes will make it harder for property companies to refinance debt in the offshore market.

    “Liquidity positions have overall weakened against 2014 due to weak sales,” said Christopher Yip, analyst at Standard & Poor’s.

    He said the need for developers to refinance their debt in 2015 was marginally higher than last year, but noted that the pressure would rise significantly in 2016 and 2017.

    The only property firm that has issued bonds in the offshore high yield market so far this year is Shimao Properties , which is seen as a safer issuer than many other junk-rated developers because of its stronger credit profile.

    When other companies do manage to issue new bonds, investors will be eyeing the specific terms — or covenants — of the issue much more carefully.

    (SD-Agencies)