Investors price in $130bn loss on China developers’ dollar bonds
Investors are pricing in almost $130bn in losses on Chinese property developers’ dollar debt on mounting worries the country's housing market will face a protracted crisis unless Beijing steps in with a large-scale bailout.
Two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for distressed status, according to a Financial Times analysis of Bloomberg data.
The rising pressure on the market comes a year after Evergrande, the world’s most indebted developer, began spiralling into default, unleashing tumult throughout a sector responsible for roughly 30 per cent of the country’s annual economic output.
Beijing’s response has been limited to incremental measures, including a cut this week to the mortgage lending rate. But analysts said policymakers’ refusal to launch a sweeping bailout may only add to the ultimate cost of rescuing the industry and could worsen the fallout for global markets and trade as Chinese growth grinds slower.
“With the industry headwinds and negative news, it’s very clear many more developers’ offshore [dollar] bond prices have fallen sharply since last year,” said Cedric Lai, a senior credit analyst at Moody’s Investors Service. “We still believe defaults will continue through the rest of 2022, particularly for developers with large offshore debt maturities and weak sales.”
Many developer dollar bonds are now priced at a level that implies a very high risk of default. One bond maturing on September 7 issued by Kaisa Group, one of the first in the sector to miss a dollar payment late last year, is priced at $0.09 on the dollar, implying a loss of about $272mn on principal of $300mn. A bond of the same size from Shanghai-based Shimao maturing in just over a year is priced just below $0.10 on the dollar, indicating a potential $268mn loss.
Taken in aggregate, investors have priced in almost $130bn of losses on the more than $200bn in outstanding dollar bond repayments owed by Chinese real estate groups, reflecting a discount of nearly two-thirds to the market’s presumed value if all repayments were made successfully.
China’s real estate groups have missed payments on a record $31.4bn worth of dollar bonds in 2022. The companies have faced particular strain due to maturity walls, in which several developers are expected to pay back principal, or the amount they initially borrowed, at once. Companies often seek to roll over borrowings into newly issued debt to extend these maturities, but ructions in the market have made this nearly impossible for most issuers.
The drumbeat of defaults is the result of what one veteran investment banker in Hong Kong described as a “perfect storm” for developers, who must try to refinance to stave off more missed payments while struggling to assuage growing doubts among Chinese homebuyers and top leaders in Beijing.
“There’s a good reason these bonds are trading at distressed levels,” said the banker, who is head of debt syndicate for Asia at a major European lender. “The odds of a lot of these guys ever repaying is anyone’s guess.”
Investors had initially hoped the worst of the pressure would be limited to the most debt-laden groups, such as Evergrande, which had grown more reliant on presales of unfinished housing in recent years in response to a crackdown on excess leverage in the sector.
But stalled construction on projects at Evergrande and a handful of high-risk developers stoked broader fears among the general public that other groups might go bust before finishing pre-sold homes. That triggered a crisis of confidence that has throttled sales revenues and thrown large swaths of the industry into a liquidity crunch.
“A more centralised bailout is probably the necessary solution here,” said Robin Xing, chief China economist at Morgan Stanley, of the looming crunch in the country’s housing market.
Xing said a Beijing-led bailout to address an estimated financing gap of up to Rmb1tn ($146bn) for unfinished housing projects would take “very strong political capital” and that the problem would become worse the longer policymakers waited to step in. “In six months that gap could expand significantly if you don’t backstop the downward spiral,” he added.
Widespread work halts on pre-sold homes have already spurred hundreds of thousands of homebuyers across China to join a nationwide boycott of mortgage payments, which analysts said had further undermined confidence in the industry.
“The whole situation is increasingly out of control,” said Rosealea Yao, a property market analyst at Gavekal Dragonomics, a consultancy. “This time last year, no one expected what we’re seeing today with mortgage boycotts and construction suspensions. A year from now, we could be facing an even worse situation.”
Official figures show home sales in China fell nearly 30% in the first half of the year to about Rmb6.6tn. Andy Suen, portfolio manager and head of Asia ex-Japan credit research at PineBridge Investments in Hong Kong, said policy support for the sector “has not been sufficient in terms of stabilising the property market, if you look at the sales numbers”.
He added that the “weakest names in the sector have already defaulted and now the problem is spreading to the higher quality ones”.
Even state-run Chinese investment banks have attempted to dump holdings of developers’ dollar debt — but staff at the banks’ international arms said they have struggled to get timely approval for the sales from Beijing. “Each time the approval arrives, the bonds have crashed further, forcing us to hold them until we can file another request,” said a Hong Kong-based product manager at one state bank.
Those crashes have left nearly all Chinese real estate groups frozen out of the international bond market, further constraining their ability to refinance and increasing the risk of default. Data from Dealogic show issuance of dollar bonds by developers has fallen 80 per cent during the year to date to just $7.2bn, on track for the lowest level of annual sales in a decade.
With $17.6bn in dollar bond payments still coming due this year and another $47bn in 2024, there is little hope among analysts for any meaningful rebound in sales this year that could help spare foreign bondholders from further defaults.
Yao, at Gavekal, forecast a 15 per cent fall in annual property sales this year and a 33 per cent drop in construction starts, with further contraction inevitable unless policymakers resolve the impasse over pre-sold homes.
“The government has to show that at the end of the day, all these households can get a house,” Yao said. “If they can’t do that, it will be very damaging for future home purchases.”
Policymakers have been hesitant to publicly discuss the scale or timing of any bailout, although the central bank, housing regulator and finance ministry have pledged to offer special loans through policy banks to ensure property projects are delivered to buyers.
But investors said the measures were either too limited in scope or, in the case of a surprise cut to China’s mortgage lending rate made this week, incapable of restoring confidence among homebuyers in pre-sold housing.
“I don’t think [policymakers] realise it’s not enough,” said a veteran fixed-income investor in Hong Kong. “You need some big bazooka action to improve sentiment as a whole.”