HONG KONG -- Hui Ka Yan, chairman of China Evergrande Group, the mainland's most indebted real estate developer, has used $1 billion of his own money to buy debt issued by the company at steep 13% interest rates.
While the move is aimed at luring other investors, analysts say the unusual bond offer only underscores the mounting financial pressure on the company, China's second-largest developer by sales.
As funding becomes harder to raise in skittish Chinese markets, more local property developers are expected to issue high-yield bonds offshore.
Evergrande said on Wednesday it sold $1.8 billion in dollar-denominated senior notes, of which Hui and a company he wholly owns subscribed for more than half.
The chairman, also known by his Mandarin name Xu Jiayin, and his company together bought $500 million in five-year notes, which bear a coupon rate of 13.75%, and $500 million in four-year debt at an interest rate of 13%, according to a filing with the Hong Kong Stock Exchange. A two-year note with an 11% interest rate was also offered.
Hui was among China's three wealthiest people in the latest Hurun China Rich List, a local ranking. His spending power received a boost in October from a dividend payment of about $1.5 billion on his roughly 70% stake in the property group.
The Guangzhou-based developer said the bond purchase signified Hui's "support and confidence in the group," and the proceeds will be used to refinance existing offshore loans.
The notes likely fall into the category of noninvestment-grade -- or junk -- bonds, with estimated ratings of B given by Standard & Poor's, B2 by Moody's Investors Service and B+ by Fitch Ratings.
"The high yields show that Evergrande really does not have better financing channels," said Alan Jin, head of property research for Asia excluding Japan at Mizuho Securities.
"[Hui] really needs to give some confidence to investors," he said. The double-digit interest rates promised by Evergrande are much higher than those in recent bond issuances by peers, which typically offered a rate between 6% to 8%.
But Jin expects other developers also will have to issue bonds with bigger coupons given their pressing need to raise cash to pay debts.
"The interest rates will rise for sure," he said.
Over the past two years, China's once-powerful property developers have been hit by a crackdown from authorities on runaway housing prices. The industry's outlook is also clouded by the trade war between the U.S. and China as well as higher borrowing costs, discouraging investors from buying properties.
Since the beginning of 2018, the country's biggest developers including Evergrande have slashed prices to accelerate sales, offering discounts of up to 30%.
Offering high interest rates may ease pressure on Evergrande in the short term. But Franco Leung, associate managing director at Moody's, said the company will face bigger payments later.
"Its average cost of funding will trend upward, given the tight liquidity conditions," he said. Short-term debt accounted for 44% of the company's total reported debt as of end of June, Leung estimated.
But David Hong, head of research at consultancy China Real Estate Information, said it is "smart" for Evergrande to offer much higher bond returns at this early stage, because the company will have to compete with more developers for limited capital when conditions deteriorate further.
"The market situation is not ideal at all," Hong said. "The offers are not that bad, actually."