Evergrande crisis leaves Chinese developers excluded from global debt markets

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Sales of international bonds by Chinese developers have all but come to a halt as the Evergrande crisis in China stokes payment default fears in the country’s real estate sector, stifling a crucial driver of the Asian high-yield debt market .

Only one developer has managed to bring in foreign bond investors since Evergrande, the world’s most indebted real estate group, missed an interest payment of $ 83.5 million last month, rocking global markets.

The sale of $ 102 million bonds by Helenbergh China Holdings this month did little to address the huge funding shortfalls among heavily indebted real estate groups. High-yield dollar debt issuance is down 28% from a year ago, according to data from Dealogic.

Bankers and investors have said conditions will likely only get worse without Beijing’s intervention.

“The market has really gotten pretty gloomy,” said a senior debt capital markets banker at a European bank, who estimated that a third of the roughly 60 Chinese developers with overdue dollar debt could end up. permanently excluded from international finance, further weakening the agreement. to flow.

The banker added that while investors had been preparing for a missed payment by Evergrande for months, a sudden default last week by luxury developer Fantasia “was a real shock to the market.”

An ICE index that tracks Chinese private issuers in the Asian high yield bond market demonstrates the extent of the contagion in the market. The effective return on the index climbed to 24% this week, from 10% in June, after fears of default increased in developers’ real estate sector.

A broader index for all Asian high-yield debt, where Chinese developers are among the biggest borrowers, is trading at 15%, down from 12% at the end of September.

Analysts at the rating agency Fitch estimated that the stock of cross-border bond issues by the Chinese real estate sector stood at $ 232 billion at the end of September, of which nearly a third is expected to mature before the end. next year. They attributed an increase in funding costs for issuers of high yield Asian debt in the third quarter primarily to “ongoing negative news regarding China Evergrande operations and a potential default.”

“International investors are probably used to a more aggressive intervention policy,” the senior banker said, pointing to a lack of strong support from Beijing in recent weeks for struggling developers. “They are looking for kung fu but they are learning tai chi.”

Bankers and investors have said issues could return quickly if China steps up its political support and encourages developer lending – or it could stagnate for months, threatening to block vital refinancing deals in the sector.

A Hong Kong-based portfolio manager suggested that the threat of contagion to lenders who have funded real estate groups would force policymakers to act quickly.

“It could last a month, but I don’t think it lasts three or four,” the portfolio manager said. The Chinese authorities “want to avoid overflows. If you put the developer loans on hold long enough, it becomes a banking problem as well. “

Sinic, another developer, said Monday it was unlikely to make payments on a bond due next week, which was trading at very distressed levels of around 25 cents on the dollar.

Evergrande, which faces a $ 20 billion stack of dollar-denominated debt, has missed five deadlines for payments to offshore bondholders. Kirkland & Ellis and Moelis, advisers to the offshore bondholders, said late last week that they had had no “significant commitments” from the company.

What is in effect the closure of global capital markets to Chinese developers further complicates their ability to refinance, which has been cited by rating agencies in the recent downgrades of Evergrande and its peers. S&P suggested that Fantasia’s default was likely to trigger cross-defaults on its other debts.

“It could also speed up repayments of the company’s other debts,” the rating agency wrote. “Creditors may request early repayment due to the deterioration of Fantasia’s credit profile. “


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