China Property Stock’s Sudden Plunge on Spinoff Plan Spooks Bondholders

(Bloomberg) -- Anything freaks out China’s dollar bond market these days, especially when it comes to property firms.

When Central China Real Estate Ltd. shares resumed trading in the afternoon in Hong Kong, they sank as much as 43%. The trigger was expected -- from Thursday, new shareholders would no longer qualify for a piece of a newly spun-off company, Central China Management Co.

The sudden plunge nonetheless rattled bondholders. The developer’s 7.65% note due in 2023 fell as much as 3.3 cents on the dollar to 94.1 cents, according to Bloomberg-compiled prices, and was briefly set for the biggest decline on record.

Concern over the future of China Huarong Asset Management Co., one of the largest issuers in China’s dollar bond market, has gripped investors for most of the past six weeks. While broader market contagion appeared to be fading, concern flared up again this week after local media reported that regulators had balked at the company’s restructuring plan.

Investors are also sensitive to sudden price moves in property developers, which are among firms most likely to be affected by a fresh government drive to deleverage. Beijing’s “three red lines” directive has introduced stricter rules on heavily indebted real estate firms raising fresh debt, spurring investor concerns about weaker borrowers, including those not officially included in the program.

By the 4 p.m. close of trade, Central China Real Estate shares had pared losses to 24% and bond prices had stabilized.

In a spinoff situation, the share price of the parent company typically drops by the value of the new, separated entity. While Central China Management has yet to price its initial public offering, Thursday’s drop in the parent shows shareholders deem it to be a key part of the business. The new firm comprised 30% of the parent’s net profit, and 34% of presales in 2020, Nomura Holdings Inc. credit desk analysts estimated in a client note on Thursday.

The new stock is set to start trading in Hong Kong May 31.

“The material stock price move was likely driven by thin liquidity” and reflects “the market’s view that the “asset light” business is relatively more valuable,” wrote Nomura analyst Iris Chen.

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