Dollar-bond defaults from Chinese property developers are rising quickly as the country’s housing market slumps, and the problem could worsen as a wave of debt from the beleaguered industry comes due in the coming months.
Real-estate developers dominate China’s international high-yield bond market, making up about 80% of its total $197 billion of debt outstanding, according to Goldman Sachs.
The market has already endured its worst selloff in a decade, after property giant China Evergrande Group skipped some interest payments to dollar bondholders in late September, and smaller rival Fantasia Holdings Group Co. surprised investors by defaulting on debt that matured in early October.
Since then, at least four other Chinese developers have either defaulted or asked investors to wait longer for repayment. A 30-day grace period for Evergrande to pay international bondholders, meanwhile, runs out this weekend, and investors are expecting the company to default on close to $20 billion in outstanding dollar debt.
The average yield on an ICE BofA index of Chinese high-yield corporate bonds stood at 20.3% Wednesday, after topping 23% last week. At the height of the selloff on Oct. 13, the average price of bonds in the index had plunged 21% in just one month—its worst performance since October 2011.
“Global investors have been offloading high-yield bonds issued by Chinese developers because of the concerns that they have, rightly, about the future of those companies and their capability to repay debts,” said Jing Sima, China strategist at BCA Research. “The lack of response from Chinese policy makers definitely adds to that concern,” she added.
While property bond prices have stabilized somewhat in recent days, many remain at distressed levels. The extreme market dislocation raises the risk of a vicious cycle, in which companies can’t refinance coming debts because borrowing costs are too high, leading to more defaults and further hits to investors’ and home buyers’ confidence.
Some investors say they are now monitoring every pending interest and principal payment in the sector, and asking chief financial officers if their companies will pay back debt as planned. “We now need to track every single coupon and upcoming maturity,” said Jim Veneau, head of fixed income for Asia at AXA Investment Managers.
On Wednesday evening, Chinese developer Modern Land (China) Co., which has a $250 million bond coming due on Oct. 25, said it is facing liquidity issues and is looking to hire a financial adviser. It scrapped an earlier plan to delay repaying most of the bond by three months.
Over the past week, China Properties Group Ltd. defaulted on $226 million in three-year notes that matured on Oct. 15. And on Tuesday, S&P Global Ratings downgraded Sinic Holdings (Group) Co. to a “selective default” rating, after the Shanghai-headquartered company failed to repay $250 million of bonds that came due a day earlier.
Xinyuan Real Estate Co., another cash-strapped developer, swapped more than $200 million in dollar bonds that were scheduled to mature on Oct. 15 with debt that matures in two years, in what is known as a distressed debt exchange.
Developers are skipping debt payments to preserve cash since it will be difficult to refinance upcoming maturities in the international bond markets if yields remain elevated, said Rachana Mehta, co-head of regional fixed income at Maybank Asset Management.
Investors are also concerned that Evergrande, Fantasia and other cash-strapped Chinese developers would give priority to paying their suppliers and creditors in mainland China, leaving less money for their offshore bondholders.
The refinancing pressure is likely to intensify, with more than $6 billion of dollar debt maturing in January, according to Goldman Sachs—up from $2.2 billion this month, and less than $2 billion in each of November and December.
At the same time, contracted sales at many developers have already fallen by more than 20% or 30% on an annual basis, and this slowdown is likely to continue.
In recent days, Moody’s Investors Service downgraded its speculative-grade ratings on numerous developers and cut its outlook on others to negative. The credit-assessment company said it expects many developers’ contracted sales to fall over the next six to 12 months, due to weaker consumer sentiment amid tight funding conditions.
Many traders and investors are watching what happens with Kaisa Group Holdings Ltd., which defaulted in 2015. One of its bonds that matures in November 2024 was bid at 30 cents on the dollar Thursday, according to Tradeweb.
On Monday, Moody’s downgraded Kaisa to B2, saying the company has up to $3.2 billion of offshore debt coming due by the end of next year. The figure includes bonds that become puttable, meaning investors are able to demand the company buys them back before their maturity date.
To be sure, bonds from some stronger companies such as Country Garden Holdings Co. and Logan Group Co. have regained some ground in recent days, after China’s central bank said any risks of financial spillover from Evergrande were controllable.
And some companies are making payments on schedule. Shimao Group Holdings Ltd. said last week that it had paid back an $820 million bond at maturity as planned.
Still, sentiment remains fragile. “Investors are not looking for bargains yet because the selloff has become pretty damaging,” said AXA’s Mr. Veneau. “There’s probably more of a mind-set of assessing the damage.”
Real estate is a major driver of the Chinese economy and financial distress among developers is likely to add to households’ reluctance to buy property, alongside other concerns such as difficulties obtaining mortgages and doubts that prices will keep rising. Chinese buyers often put large sums of money down upfront for as-yet unfinished projects.
“The true concern is that this will negatively impact economic growth, as it affects home-buyer appetite to buy homes,” said Tracy Chen, a portfolio manager at Brandywine Global.
To turn more positive on the sector, Ms. Mehta of Maybank Asset Management said she was waiting for the market for new debt issuance to reopen for developers, or for signs of government support to emerge. These could come at next month’s full gathering, or plenum, of the central committee of China’s Communist Party.
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