Evergrande Group, one of China’s largest developers and owners of real estate, is facing a crisis as it defaults on debt. An investigation into the company revealed that the developer had used fraudulent accounting practices to hide losses and pay off investors. The scandal has led to a wave of defaults by other Chinese developers who are now being investigated for similar conduct.
The evergrande debt is a problem that has been present for a while. Evergrande, the Chinese developer of the tallest building in Hong Kong, has defaulted on its debts and was taken over by an investment company.
HONG KONG, China— In the Chinese junk bond market, the agony is spreading.
When China’s housing market slumps, dollar-bond defaults by Chinese property developers are on the rise, and the issue may become worse as a slew of debt from the troubled sector comes due in the coming months.
According to Goldman Sachs, real estate developers dominate China’s foreign high-yield bond market, accounting for about 80% of the country’s total $197 billion in debt outstanding.
After property giant China Evergrande Group EGRNF 1.39 percent 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, the market has already experienced its worst selloff in a decade.
This month, an Evergrande facility in Lu’an, Anhui Province, China.
Photo courtesy of The Wall Street Journal’s Raul Ariano.
At least four other Chinese developers have defaulted or requested investors to wait longer for repayment since then. Meanwhile, Evergrande’s 30-day grace period to pay foreign bondholders expires this weekend, and analysts anticipate the firm to fail on almost $20 billion in outstanding dollar debt.
After reaching 23 percent last week, the average yield on an ICE BofA index of Chinese high-yield corporate bonds was 20.3 percent on Wednesday. On Oct. 13, at the peak of the selloff, the average price of bonds in the index had dropped 21% in a month, the worst performance since October 2011.
“Global investors have been dumping high-yield bonds issued by Chinese developers because of their legitimate worries about such firms’ future prospects and capacity to repay loans,” said Jing Sima, China analyst at BCA Research. She said, “The lack of reaction from Chinese policymakers certainly contributes to that worry.”
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While property bond prices have recently stabilized, many remain in a state of crisis. The severe market turbulence increases the danger of a vicious cycle, in which businesses are unable to refinance existing loans due to excessive borrowing rates, resulting in additional defaults and a loss of trust among investors and property purchasers.
Some investors say they’re now keeping an eye on every pending interest and principle payment in the sector, and they’re questioning CFOs whether their businesses will repay their debts on time. “We now have to monitor every single coupon and impending maturity,” said Jim Veneau, AXA Investment Managers’ head of fixed income for Asia.
Modern Land (China) Co., a Chinese developer with a $250 million bond due on Oct. 25, said on Wednesday evening that it is experiencing liquidity difficulties and is seeking to engage a financial advisor. It canceled a previous intention to postpone the repayment of the majority of the bond by three months.
China Properties Group Ltd. defaulted on $226 million in three-year notes that were due on Oct. 15 this week. Sinic Holdings (Group) Co. was reduced to a “selective default” rating by S&P Global Ratings on Tuesday after the Shanghai-based firm failed to repay $250 million in bonds that were due a day earlier.
Another cash-strapped developer, Xinyuan Real Estate Co., exchanged more than $200 million in dollar notes due to maturity on Oct. 15 for debt due in two years, in what is known as a distressed debt exchange.
Developers are deferring loan payments to save money since refinancing future maturities in foreign bond markets would be challenging if rates stay high, according to Rachana Mehta, co-head of regional fixed income at Maybank Asset Management.
“‘We now have to keep track of every single coupon and impending maturity,’ says the executive.
AXA Investment Managers’ Jim Veneau
Investors are also worried that Evergrande, Fantasia, and other cash-strapped Chinese developers would prioritize paying their mainland Chinese suppliers and creditors above paying their offshore bonds.
According to Goldman Sachs, more than $6 billion in dollar debt matures in January, up from $2.2 billion last month and less than $2 billion in each of November and December.
At the same time, several developers’ contractual sales have already dropped by more than 20% or 30% on an annual basis, and this trend is expected to continue.
China’s economy slowed dramatically in the third quarter as the effects of the epidemic faded, and Beijing is now focusing on longer-term problems such as family debt and energy usage. Anna Hirtenstein of the Wall Street Journal outlines what investors are looking for. Long Wei/Sipa Asia/Zuma Press photo
Moody’s Investors Service has lowered some developers’ speculative-grade ratings and changed the outlook on others to negative. Due to lower consumer mood and tighter financing circumstances, the credit-assessment firm anticipates many developers’ contractual sales to decrease over the next six to twelve months, according to the credit-assessment firm.
Many traders and investors are keeping an eye on the situation of Kaisa Group Holdings Ltd., which went bankrupt in 2015. According to Tradeweb, one of its bonds due in November 2024 was auctioned at 30 cents on the dollar on Thursday.
Moody’s downgraded Kaisa to B2 on Monday, citing the company’s $3.2 billion in offshore debt maturing by the end of next year. The number includes puttable bonds, which allow investors to demand that the business purchase them back before their maturity date.
Bonds from some of the stronger firms, such as Country Garden Holdings Co. and Logan Group Co., have recovered some ground in recent days, after China’s central bank said that any financial spillover concerns from Evergrande were manageable.
Furthermore, some businesses make payments on time. Shimao Group Holdings Ltd. said last week that it has successfully repaid a $820 million bond at maturity.
Still, public opinion is shaky. Mr. Veneau of AXA stated, “Investors are not searching for bargains just yet since the selloff has been very severe.” “It’s more likely that there’s a mindset of evaluating the damage.”
Financial hardship among developers is expected to contribute to consumers’ hesitation to purchase property, among other worries such as difficulty getting mortgages and uncertainties that prices would continue to rise, since real estate is a key engine of the Chinese economy. For as-yet-unfinished projects, Chinese purchasers often lay down significant amounts of money up advance.
“The real worry is that this will have a negative effect on economic development since it impacts homebuyer appetite,” Tracy Chen, a portfolio manager at Brandywine Global, said.
Ms. Mehta of Maybank Asset Management said she was waiting for the market for fresh debt issuance to reopen for developers, or for indications of government assistance, to become more bullish on the industry. These may be announced during the Communist Party of China’s central committee’s full meeting, or plenum, next month.
Evergrande Group of China: Stalled Construction and Huge Debts
Frances Yoon, Quentin Webb, and Elaine Yu can be reached at [email protected], [email protected], and [email protected], respectively.
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