International bond sales by Chinese developers have all but halted as the crisis at China Evergrande stokes fears of defaults across the country's property sector, throttling a crucial driver of Asia's high-yield debt market.
Just one developer has managed to tap overseas bond investors since Evergrande, the world’s most indebted real estate group, missed an $83.5m interest payment last month, rattling global markets.
The $102 million (€88 million) bond sale by Helenbergh China Holdings this month has done little to address huge funding shortfalls among heavily leveraged property groups. Issuance of high-yield dollar debt is down 28 per cent from a year ago, according to data from Dealogic.
Bankers and investors said conditions were likely only to worsen without intervention from Beijing.
“The market really has turned quite gloomy,” said a senior debt capital markets banker at one European bank, who estimated that a third of the approximately 60 Chinese developers with outstanding dollar debt could end up permanently frozen out of international finance, further weakening deal flow.
The banker added that while investors had been braced for a missed payment by Evergrande for months, a sudden default last week by luxury developer Fantasia “was a real shock to the market”.
An ICE index tracking Chinese corporate issuers in Asia’s high-yield bond market demonstrates the scale of market contagion. The effective yield on the index has shot up to 24 per cent this week from 10 per cent in June, after fears of defaults spiralled across the developer property sector.
A broader index for all Asian high-yield debt, where Chinese developers are among the biggest borrowers, is trading at 15 per cent, compared with 12 per cent at the end of September.
Analysts at credit rating agency Fitch estimated that outstanding cross-border bond issuance by China's real estate sector totalled $232bn at the end of September, almost a third of which is expected to mature before the end of next year. They attributed a rise in funding costs for Asian high-yield debt issuers in the third quarter primarily to "ongoing negative news concerning China Evergrande's operations and potential default".
“International investors are probably used to more aggressive, intervention-style policy,” the senior banker said, pointing to a lack of strong support from Beijing in recent weeks for struggling developers. “They are looking for kung fu but they’re getting tai chi.”
Bankers and investors said issuance could return promptly if China stepped up policy support and encouraged lending to developers - or it could stall for months, threatening to stall vital refinancing deals across the sector.
One Hong Kong-based portfolio manager suggested that the threat of contagion to lenders that financed property groups would force policymakers to act soon.
“This could last a month, but I don’t see it lasting three or four,” the portfolio manager said. Chinese authorities “want to prevent spillover. If you cut off lending to developers long enough, it also becomes a bank problem.”
Sinic, another developer, said on Monday that it was unlikely to make payments on a bond due next week, which was trading at highly distressed levels of about 25 cents on the dollar.
Evergrande, which faces a $20bn pile of dollar-denominated debt, has missed five deadlines on payments to offshore bondholders. Kirkland & Ellis and Moelis, advisers to offshore bondholders, said late last week that they have had no "meaningful engagement" from the company.
What is in effect the closure of global capital markets to Chinese developers further complicates their ability to refinance, which has been cited by rating agencies in recent downgrades of Evergrande and its peers. S&P suggested the Fantasia default was likely to trigger cross-defaults on its other debt.
“It could also accelerate repayments on the company’s other debt,” the rating agency wrote. “Creditors may seek early repayment owing to Fantasia’s deteriorating credit profile.” – Copyright The Financial Times Limited 2021