The problem could get worse as a wave of debt from the troubled industry wears off in the coming months.
The pain is spreading in the Chinese junk bond market.
Dollar bond defaults by Chinese property developers are increasing rapidly as the country’s housing market plummets, and the problem could worsen as a wave of debt from the troubled industry hits the U.S. next months.
Real estate developers dominate China’s international high-yield bond market, accounting for about 80% of its total $ 197 billion of outstanding debt, according to Goldman Sachs.
The market has already suffered its worst sell-off in a decade, after China’s real estate giant Evergrande Group EGRNF 1.39% missed some interest payments to dollar bondholders in late September, and its smaller rival Fantasia Holdings Group Co. October.
Since then, at least four other Chinese developers have defaulted or asked investors to wait longer for repayment. Meanwhile, a 30-day grace period for Evergrande to pay international bondholders runs out this weekend, with investors expecting the company to fail to pay about $ 20 billion in outstanding debt.
The average yield of an ICE BofA index of high-yield Chinese corporate bonds stood at 20.3% on Wednesday, after surpassing 23% last week. At the height of the October 13 selloff, the average price of bonds in the index had plummeted 21% in just one month, its worst performance since October 2011.
“Global investors have been ditching high-yield bonds issued by Chinese developers because of their concerns, rightly so, about the future of those companies and their ability to pay off debts,” said Jing Sima, China strategist at BCA. Research. “The lack of response from Chinese policymakers definitely adds to that concern,” he added.
While real estate bond prices have stabilized somewhat in recent days, many remain at difficult levels. Extreme market dislocation increases the risk of a vicious cycle, in which companies are unable to roll over upcoming debts because borrowing costs are too high, leading to more defaults and more shocks to investor and buyer confidence. household.
Some investors say they are now monitoring all outstanding interest and principal payments in the sector, asking CFOs whether their companies will pay off debt as planned. “Now we have to keep track of each coupon and the upcoming maturity,” said Jim Veneau, head of fixed income for Asia at AXA Investment Managers.
On Wednesday night, Chinese developer Modern Land (China) Co., which has a $ 250 million bond due October 25, said it faces liquidity problems and is looking to hire a financial advisor. He scrapped an earlier plan to delay paying 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 October 15. And on Tuesday, S&P Global Ratings downgraded Sinic Holdings (Group) Co. to a “selective default” rating after the Shanghai-based company failed to repay $ 250 million in bonds that were due a day earlier.
Xinyuan Real Estate Co., another cash-strapped developer, redeemed more than $ 200 million in dollar bonds that were scheduled to mature on October 15 for debt that matures in two years, in what is known as a debt swap. distressed debt.
Developers are skipping debt payments to preserve cash, as it will be difficult to roll over upcoming maturities in international bond markets if yields remain high, 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 mindset 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 emerging. These could come at next month’s full gathering, or plenum, of the central committee of China’s Communist Party.