Broken promises of Chinese property developers undermine investor confidence

Since last summer, when China Evergrande Group’s financial troubles triggered a selloff in the bonds of the giant property company and its peers, the market has remained deeply distressed, with no end in sight. A string of measures by Chinese authorities, local governments and banks to support the housing market and help developers access onshore funding have so far done little to change the mood in the market. Data from Chinese data provider CRIC showed monthly contract sales volumes of China’s top 100 developers fell for the eighth consecutive month in February, down 47% from a year earlier.

Over the past five months, the average return on dollar bonds of Chinese developers has been more than 20%, making it too expensive for most companies to raise fresh money to pay off matured debt. To complicate matters, many developers, who had earlier claimed sufficient liquidity to repay their loans, surprised investors by retracting their statements without warning, revealing the transparency and truthfulness of the companies’ disclosures to bondholders. Damaged an already weak trust.

“Trust takes time to build, but it takes only one step to destroy,” said Freddie Wong, head of Asia-Pacific region of Invesco’s fixed-income business. Investors were willing to lend to developers who deliver on their promises, but once that trust is broken, it will be “nearly impossible” to repair it, he said.

According to Fitch Ratings, since the beginning of 2021, Chinese developers have defaulted the equivalent of $8.8 billion in offshore dollar bonds and $5.1 billion in onshore yuan-denominated bonds, dwarfing the total amount of bonds defaulted in previous years. gives.

The latest negative surprise came from a small Chinese developer called Genro Properties Group Ltd. Foreign investors were caught in late February when the Shanghai-based company placed an early January promise on the Hong Kong stock-exchange. Filing—March 5 to redeem a $200 million perpetual bond. Genero also assured investors that it has the equivalent of a $1.4 billion line of credit from Bank of China, a large state-owned lender.

All seemed well until online speculation began on February 11 that Genero was not going to redeem the bonds as planned. Amid a deep sell-off in its shares and dollar bonds, the firm publicly dismissed the rumor as “untrue and fictitious” via another exchange filing. A few days later, Genero asked investors for consent to delay redemption by a year. Its perpetual bonds were recently auctioned off at 22% of their face value, up from 92% on February 9, according to Tradeweb data.

Some investors have compared Genero’s sudden turnaround last week to an October 2021 event, when Chinese luxury developer Fantasia Holdings Group company defaulted on a dollar bond soon after it planned to repay debt to some bondholders.

Two weeks before the default, Fantasia also said in a stock-exchange filing that it had “no liquidity issues.” The price of that bond, which was 99 cents on the dollar the day before the maturity date, immediately fell to about 22 cents and sparked a sell-off in the asset bond.

Several other developers also backed out of their bond redemption plans in recent months. Prior to Evergrande’s fall last summer, the property giant had also repeatedly said that its operations were normal and that it had never missed interest or principal payments on its dollar bonds. It skipped interest payments in September and defaulted on some offshore loans in December.

Investors have now adopted a “sell first and think later” mentality and are extremely sensitive to rumours, said Iris Chen, a credit analyst at Nomura. The thinking is that what companies say in regulatory filings does not ensure that firms will live up to their promises.

Another major problem is off-balance-sheet liabilities that many developers had not previously disclosed to investors or credit-rating companies. Hidden debt includes guarantees on money-management products or personal loans.

The troubles of Shimao Group Holdings Ltd., which used to be one of the few Chinese developers with investment-grade ratings from major ratings firms, show how quickly the company’s liquidity position can change. Late last year, S&P Global Ratings and Fitch Ratings downgraded Shimao to a speculative grade because of what they said was deteriorating business conditions. This was followed by further reductions, as the turmoil of the bond market increased the company’s refinancing risk.

Then in January, investors panicked over media reports that Shimao had missed payments on trust loans that had not previously been disclosed, and that its dollar bonds had fallen to distressed levels. Shimao later said that two of its subsidiaries had provided guarantees to a borrower who had taken out a trust loan, and the situation was being worked out.

Its dollar bonds have fallen below 30 cents on the dollar last week, despite Shimao’s efforts to address investor concerns, raise cash and increase home sales, according to data from TradeWeb. was almost equal.

In previous years, broad sell-offs in Chinese developers’ bonds were often followed by quick snapbacks and large price rebounds for many firms, rewarding bottom-fishing investors who were not impressed by the long-term prospects of the country’s property sector and its eventual prospects. There was a strong belief about recovery.

This time it has not happened. None of the 42 high-yield bond funds in Asia or China tracked by Morningstar delivered positive returns in the past three months, and nearly all have been down over the past year.

UBS Asset Management’s Hong Kong-based $180 million China high-yield bond fund — the worst performer among 42 funds — lost 21% over the past three months and nearly 40% over the past year. High-yield funds from Asia and China had inflows of more than $2.9 billion during the fourth quarter, according to data from Morningstar.

James Wong, Executive Director and Fixed-Income Portfolio Manager, Gaoteng Global Asset Management, said: “Looking back a year later, we might think we were overreacting, but right now the impact of the contagion in this area is enormous. is big.”

The best thing that can restore investor confidence is improvement in sales and operating cash flow of developers. “Also, nothing they say or do will solve the fundamental problem,” said Frank Zheng, head of international fixed income at China Asset Management Company.

No company can afford to stay in business, which has a nearly 40% drop in monthly sales, zero external funding and a wall of mounting debt, he said. “The situation in the Chinese property market is now worse than most people predicted at the beginning of the year.”

This story has been published without modification to the text from a wire agency feed