The evergreen crisis has closed the bond market to China’s junk borrowers

Sales of new junk bonds in dollars by Chinese borrowers this month fell nearly 90% from their five-year average to $352 million on Wednesday, Dealogic data shows, reflecting just two deals from smaller developers.

With investors grappling with China Evergrande Group’s difficulties and a string of defaults by smaller property developers, Chinese junk bonds in the dollar were yielding about 21.6% on Wednesday, according to an ICE BofA index — interest rates that effectively reduce new debt. Very expensive to issue. many companies.

Developers dominate China’s international high-yield bond market, accounting for about 80% of its total debt of $197 billion, according to Goldman Sachs. These companies have typically relied on short-term lending, which in some cases involves issuing loans in less than a year, making their refinancing needs more pressing.

With this source of funding mostly closed and revenues from home sales likely to remain weak, industry participants worry that more Chinese property developers may struggle to repay dollar debt in the coming months. Goldman says more than $6 billion of junk-rated debt from the sector matures in January alone.

This week, S&P Global Ratings said that developers to whom it assigns credit ratings have about $40 billion in international bonds from this month to the end of 2022.

Concerns about refinancing risk prompted Fitch Ratings and S&P Global Ratings to downgrade their already low ratings on Casa Group Holdings Ltd on Wednesday, and put pressure on developer’s bonds, which are already at distressed levels. do business. Both rating companies downgraded CASA two places to CCC+, which was near the bottom of the junk rating scale.

In 2015, Cassa was an early and high-profile example of a Chinese corporate borrower defaulting on international debt. But it later returned to bond markets and was able to sell off new debt as recently as last July, when it issued $200 million in one-year notes.

Bankers don’t expect the new junk-bond sales in the market to recover anytime soon. David Yim, head of Greater China and North Asia Capital Markets at Standard Chartered Bank, said January and February were typically busy months for asset-bond deals, “but given the issues in the region, I don’t think that period will be So much activity,” he said.

If no more deals are done by Sunday, it will be the slowest month since April 2020, when global markets were battling the Covid-19 pandemic and no Chinese junk bonds were sold at all. Volumes can vary widely and in recent years the market has sometimes stopped completely. But in the five years through September, issuance has averaged $3.4 billion a month, data from DeLogic shows.

Investors have suffered huge losses after an unexpected default by Fantasia Holdings Group Company on October 4. That helped trigger the sale in dozens of dollar-denominated asset bonds. This put further pressure on an already troubled market by Evergrande’s reduction in interest payments at the end of September.

Other developers have also defaulted, including the Modern Land (China) company, which on Tuesday said it had failed to repay a $250 million bond.

Last week, Evergrande unexpectedly avoided a default by paying $83.5 million in interest to international bondholders shortly before the 30-day grace period ended. The grace period on another overdue payment expires on Friday.

On Tuesday, Chinese officials met with corporate borrowers from key industries and told them they would allow reasonable requests to raise new international debt or transfer funds offshore to repay creditors.

The National Development and Reform Commission said it and another regulator, the State Administration of Foreign Exchange, also asked companies to optimize their foreign-debt structure and prepare for upcoming principal and interest payments.

CCB International Securities analyst Lung Siufung wrote in a note to clients that the recent actions by regulators will help stabilize market confidence and prompt policymakers to take steps to restore sentiment among home buyers in the medium term. is likely to.

International bond markets are still open to Chinese borrowers with strong credit ratings. The Chinese government itself sold $4 billion worth of bonds this month, and financial borrowers such as ICBC Financial Leasing Company have also issued new loans.

Data from Dealogic shows that sales of Chinese dollar-denominated bonds by investment-grade borrowers fell to $7.9 billion so far this month, from $23.2 billion in the same period last year.

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