Bond ructions intensify risk of ‘downward spiral’ for Chinese property groups
A bout of selling this week in junk bonds issued by riskier Chinese property developers has sent their borrowing costs soaring to the highest level in a decade and imperilled companies’ ability to access an important funding source.
The wobble in the market for dollar-denominated debt of Chinese companies that carry a speculative-grade credit rating comes as concerns mount over a string of missed bond payments by large real estate developers such as Evergrande, Sinic and Fantasia.
The sector, which is grappling with a slowdown in the Chinese property market and pressure from Beijing to reduce its debts, is now facing exorbitant borrowing costs at a time when companies desperately need cash to avoid defaulting on their debts.
“The downward spiral for Chinese developers is the result of a massive liquidity squeeze,” said Paul Lukaszewski, head of corporate debt for Asia-Pacific at Abrdn. “Few companies can survive for long in environments where they cannot access their internal cash or external financing.”
Kaisa, one of the biggest borrowers in the sector, could this week add to a growing list of businesses that have missed interest payments ahead of two imminent deadlines it faces on its offshore bonds. Earlier this week, it pleaded with investors for “more time” after missed payments on wealth management products in mainland China.
Its trajectory echoes that of Evergrande, the world’s most indebted property developer, which initially alerted global markets to the issues across China’s real estate industry when it missed offshore bond payments in September, weeks after problems also arose on wealth management products it guaranteed. Holders of some bonds in Evergrande said they had received payments before a 30-day grace period expired on Wednesday.
Since September, international bond markets have been essentially closed to property developers. The average yield on an Ice Data Services index of Chinese high-yield dollar bonds, which is dominated by property companies, jumped close to 29 per cent this week from 14 per cent at the start of September. The rise brings the key barometer of borrowing costs to the highest level since the 2008-09 global financial crisis.
Investors compared the property bond drama this week to scenes during that period and the Asian financial crisis of 1997-98, though they pointed out that the sector-specific issues had yet to spill over to other capital markets or sectors in the region. China on Wednesday was able to issue a euro-denominated sovereign bond in several tranches, of which a three-year portion was priced at a negative yield. Average yields on Chinese investment-grade debt are just 3 per cent, according to Ice Data Services.
Chinese real estate developers have become the most prominent borrowers across Asia’s entire $400bn high-yield bond market on the back of their role in building homes in a rapidly urbanising economy. But they have faced pressure from Beijing to reduce their vast debts since fears mounted over asset bubbles in the property market last year.
The liquidity issues that originally struck heavily indebted Evergrande over the summer have since engulfed several of its peers, which defaulted on offshore debt last month. Chinese property developers rely on a continual stream of property sales to bring in cash, but the mainland market has slowed markedly over recent months and home prices have come under pressure.
“I think probably we’re going to see more defaults down the road, and more contagion to other developers,” said Larry Hu, chief China economist at Macquarie. “I don’t think they can issue bonds anywhere right now.”
Chinese real estate groups have raised just $320m from two dollar bond sales in the fourth quarter so far, a period when they typically raise billions of dollars, according to data from Dealogic.
In a sign of rising alarm over the severity of an offshore market sell-off, state-backed media this week indicated that some of the recently implemented restrictions on the sector could be loosened.
The Securities Times on Wednesday reported that some developers might be able to access interbank markets for financing. Yields, which move inversely to prices, on some highly rated names recovered on the developments.
Bonds maturing in 2024 issued by Country Garden, China’s biggest developer by sales, rose 5 cents to 91 cents on the dollar on Thursday after falling earlier this week, although investors noted that lower-quality names did not benefit from the rally.
As well as restrictions on developer debt, China introduced limits on mortgage lending earlier this year as part of its push to rein in asset prices.
The People’s Bank of China on Wednesday published on a social media account figures showing a month-on-month rise in mortgage lending in October, which analysts said could imply the central bank hoped to reassure investors concerned about the nation’s property market.
“The marginal relaxation on mortgage lending will not be enough to prevent stress for cash-strapped developers from worsening further,” said Wei He, an analyst at Gavekal Dragonomics in Beijing.