Finace And Stock

Chinese Property Bonds Hammered by Weak September Sales and a Surprise Default

Shrinking apartment sales and an unexpected default have stoked fresh investor concerns about China’s property developers, causing a steep selloff in U.S. dollar bonds from many of the sector’s debt-laden companies.

On Wednesday, traders said dozens of dollar bonds sold by Chinese real-estate companies tumbled in price, pushing yields on those bonds higher. The selldown extended sharp declines logged the previous day, reflecting increasing investor pessimism after luxury developer

Fantasia Holdings Group Co.

failed to repay $206 million in dollar bonds that matured on Monday.

Some developers’ sales figures for September have also showed a significant drop in home-buyer demand, after embattled property giant

China Evergrande Group

ran short of cash and was forced to halt construction at some of its unfinished residential projects.

The weak numbers in part reflect China’s broader efforts to tame the housing market, while Evergrande’s problems might have also made Chinese citizens less willing to put down money for new homes built by other private developers, analysts say.

Debt issued by companies such as

Kaisa Group Holdings Ltd.

,

Redsun Properties Group Ltd.

, and

Yuzhou Group Holdings Co.

tumbled in price. An 11.25% bond from Kaisa due in April 2022 dropped to less than 73 cents on the dollar by late Wednesday in Hong Kong, down from more than 86 cents at the start of Tuesday, according to Tradeweb.

An ICE BofA index of high-yield dollar bonds from Chinese companies showed a yield of more than 17% on Tuesday, its highest in nearly 10 years. Property bonds make up a large part of the gauge.

“Trading has been extremely active. It has been very choppy; markets are very nervous,” said Michel Lowy, the chief executive of SC Lowy, a financial institution specializing in distressed and high-yield debt.  ”It’s not just Fantasia. That was material, but seeing developers come through with pretty horrendous sales numbers for September is not helping,” he added.

Paras Gupta, head of discretionary portfolio management for Asia at Union Bancaire Privée, said the selling has also spread to bonds of Chinese developers that are on a firmer financial footing. “It is now a full-blown risk aversion to this sector,” he said.

An ICE BofA index of high-yield dollar bonds from Chinese companies showed a yield of more than 17% on Tuesday, its highest in nearly 10 years.



Photo:

jerome favre/Shutterstock

A bond due in 2031 from

Country Garden Holdings Co.

, one of China’s larger and financially stronger developers, was quoted Wednesday at about 88.75 cents on the dollar, according to Tradeweb.

The main trigger for the recent declines was Fantasia’s bond default, which occurred just days after Evergrande missed a second interest payment deadline on a set of dollar bonds. While Evergrande has a 30-day grace period before its offshore investors can declare a default, there was no grace period on Fantasia’s bond that matured Monday.

Fantasia’s nonpayment surprised investors because the Shenzhen-headquartered developer had recently said it had no liquidity issues, and indicated it had enough cash to repay the outstanding amount on a five-year dollar bond it issued in 2016. Fantasia, like Evergrande, was an active issuer of high-yield dollar bonds in the last few years.

Some market participants surmised that Fantasia and its controlling shareholders had elected not to repay the company’s international debt, which raised doubts as to whether other Chinese developers might do the same to conserve cash or give priority to their onshore creditors.

“Market confidence is shattered by the recent event, which has triggered a reassessment by investors of sponsors’ willingness to pay,” said Jenny Zeng, co-head of Asia Pacific fixed income and a portfolio manager at AllianceBernstein in Hong Kong.

She said about half of China’s high-yield property bonds were now trading at yields of above 20%—implying a high default risk for those companies and making it hard for them to refinance coming debts.

Last month was possibly the worst September for industry sales in the past 20 years, CCB International analyst Lung Siufung wrote in a note to clients Monday, noting that September and October are traditionally the peak season for home sales in China.

Citing statistics from CRIC, a data provider, Mr. Lung said that average contracted sales for key developers dropped 28% compared with September of last year.

Some individual developers have also reported steep drops in sales. Hong Kong-listed Kaisa said this week that contracted sales in September totaled 5.7 billion yuan, equivalent to $884.3 million. That was down 28% from a month earlier.

Evergrande, meanwhile, earlier warned of a steep drop in September contracted sales following declines over the summer.

Prices of junk bonds are now implying that investors expect more bond defaults among Chinese developers.

“The market is assuming the worst and without government intervention, the degree of distress priced into assets may materialize,” said Paul Lukaszewski, head of corporate debt for the Asia Pacific region at asset-management firm Abrdn.

Mr. Lowy at SC Lowy said several measures might help stabilize the market, including government easing of policy, maturing dollar bonds being paid off as promised by developers, and Evergrande and Fantasia outlining reasonable restructuring plans.

China Evergrande Group: Stalled Construction, Massive Debts

Write to Frances Yoon at frances.yoon@wsj.com and Quentin Webb at quentin.webb@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


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