Friday 16 November 2018

Default risks rise in China's €355bn builder bond market

Clampdown: Property developers in Beijing and across China have been caught in the storm of a funding crunch
Clampdown: Property developers in Beijing and across China have been caught in the storm of a funding crunch

Carrie Hong

Investors are bracing for more debt defaults among China's cash-squeezed real estate developers as funding costs surge and refinancing pressure intensifies.

Borrowing costs in dollars for China's high-yield issuers, most of whom are property developers, almost doubled this year to 11.2pc, the highest in about four years, ICE BofAML indexes show. To make things worse, the sector faces a record $18bn bond maturities in both onshore and offshore markets in the first quarter of 2019.

That number is expected to double if investors demand early repayment on some of these notes, according to Bloomberg-compiled data.

China's property developers have been caught in the storm of a funding crunch facing the nation's private sector due to a two-year long clampdown on shadow financing.

Although authorities have rolled out measures to ease funding for non-state firms, the existing property control policies won't loosen, the official Xinhua New Agency said in a commentary last week.

At least four property-related firms defaulted on notes this year.

"Funding conditions may not improve until sentiment changes," said Clement Chong, a Singapore-based senior credit analyst at NN Investment Partners Ltd. "Defaults are happening more frequently onshore. I believe some developers will be caught up in this if funding cost keeps rising."

Wuzhou International Holdings, a developer based in Wuxi, failed to repay notes in both the offshore and domestic markets this year. Neoglory Holding Group, a handicraft maker that also has real estate business, reneged on at least three local bond payments in the past two months.

Even the country's largest developers have had to pay sky-high yields on dollar bonds to lure investors. Junk-rated China Evergrande Group, the nation's second largest builder by sales, sold $1.8bn three-tranche notes last week. The 13.75pc coupon on the five-year bond was the highest interest rate it has ever paid on a dollar debenture, according to Bloomberg data.

With assistance from Emma Dong, Molly Dai and Finbarr Flynn

(Bloomberg)

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