Chinese junk bond yields exceed 25% as tensions in the real estate market intensify

HONG KONG — The biggest sell-off that China’s international junk bond market has ever seen wiped out about a third of bondholders’ wealth in just six months.

The steep and rapid decline shows how regulatory restrictions on borrowing, severely dislocated credit markets and slowing home sales have combined to put pressure on more Chinese real estate developers, who account for the bulk of high-yield issuance from China.

What started in early summer as a crisis of confidence around industry giant China Evergrande Group EGRNF 10.19%

has spread to many real estate companies who are now at a much higher risk of renegotiating their debt. At least four developers have defaulted on dollar bonds since September.

The market suffered another wave of selling late last week and Monday, as investors even ditched bonds issued by financially stronger developers. On Friday, the yield of an ICE BofA index of Chinese junk bonds exceeded 25% for the first time since March 2009, near the peak of the global financial crisis, and it rose again on Monday, to 26.6%.

The bonds in the index are collectively valued by the market at nearly $ 39 billion below their combined face value of $ 112 billion, according to the data. Six months earlier, there was little difference between the market and the nominal values ​​of the index bonds. Bond yields rise as prices fall.

“Market sentiment is still very weak,” said Jenny Zeng, co-head of Asia-Pacific fixed income at AllianceBernstein.

“The key question is who has enough cash to get by? She added, which means companies can pay off short-term maturities until the market recovers from further inflows, or the Chinese government introduces support measures.

Soaring yields imply very high default risks, and add to the problems for developers, making it difficult if not impossible for companies to refinance themselves by issuing new debt.

“It’s a surprise how affected even high-quality companies are,” said Jim Veneau, head of fixed income for Asia at AXA Investment Managers. “There is no doubt that market distress is starting to become a factor in itself for businesses,” he added.

In total, Chinese unwanted borrowers have approximately $ 197 billion in debt outstanding, Goldman Sachs analysts estimated. This means that the ICE BofA index covers just over half of this total debt, implying that the total losses for investors are considerably greater.

Including cash from bond interest payments, the index has generated a total return of minus 28% so far this year, putting it on track for its worst performance since 2008. But this year’s sell-off is much larger in dollar terms, affecting many more investors. The total face value of the ICE BofA Asian Dollar High Yield Corporate China Issuers Index was only $ 3.2 billion at the end of 2008.

Kaisa Group Ltd.

1638 1.10%

, one of the real estate sector’s biggest borrowers in international bond markets, is one of the recent casualties, with both bonds and stocks sold since late September. The company defaulted in 2015, when Chinese company defaults were much rarer, but has since regained access to international markets.

Kaisa said last week that a wealth management product he guaranteed missed a payment and he was working on a payment plan for this investment vehicle. Kaisa said she was facing unprecedented liquidity pressure, amid degrading credit ratings and a “difficult environment in the real estate market”. It halted trading in its shares on Friday morning and its dollar bonds due 2024 were recently offered at around 29 cents on the dollar.

AXA’s Mr Veneau said investors feared other developers might be forced to repay similar debts as well. “It appears that some of these wealth management products have not been disclosed or properly communicated before. The impression is that there have been surprises, that there could still be new revelations that there have been WMP engagements, ”he said.

Shimao group holdings Ltd.

813 -5.40%

also suffered from market pressure. On Friday evening, the company denied reports that it was behind in paying off debt owed to a non-bank lender. Shimao said reports that a subsidiary was in talks with a non-bank lender, Lujiazui International Trust Co., to extend its payment schedule was false.

Shimao management said in a conference call with investors that it would be a big problem for the industry if restrictive policies continued and refinancing remained closed, according to Leonard Law, senior credit analyst at Lucror Analytics. Shimao also reduced its contract sales target this year, Law wrote in a note to customers, to about 290 billion yuan, the equivalent of about 45.3 billion yuan, from a previous target of 330. billion yuan.

Shimao’s $ 1 billion, 5.6% bond, due 2026, was listed at less than 65 cents to the dollar Monday afternoon in Hong Kong, according to Tradeweb, down from around 88 cents a week earlier.

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Recent data from the company showed that a sharp drop in sales, already evident in September, extended into October for many developers. In recent years, contract sales, which reflect the value of contracts signed with new home buyers, have generally been buoyant in the two months thanks to holiday promotions offered around the National Day of October 1 in China.

Industry heavyweight Sunac China Holdings Ltd.

1918 -2.04%

, for example, said on Friday that contract sales in October fell to about 51 billion yuan, the equivalent of $ 8.0 billion, a decline of nearly 28% from the previous year.

In some cases, the declines have moderated. China Vanke Co.

reports a nearly 20% drop in sales in October, less pronounced than a nearly 34% drop in September.

China Evergrande Group: Block construction, massive debts

Write to Quentin Webb at [email protected] and Frances Yoon at [email protected]

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Penny D. Jackson