China’s Credit Market Rocked by More Debt Delays, Plunging Bonds

Wei Zhou and Dorothy Ma
Thu, July 21, 2022


(Bloomberg) -- China’s credit market is now showing stress on an almost daily basis, as a worsening property crisis shatters assumptions about safe borrowers and even Chinese investors turn against troubled debtors.

The country’s junk dollar bonds were on the brink of record lows Thursday, as a state-backed developer sought payment delays on $1.6 billion of dollar notes. In other signs of stress, the debt of a private builder deemed healthy just months ago sank, while creditors spurned a restructuring plan by the parent of BMW AG’s China partner.

Taken together, the incidents point to a credit market in a new phase of turmoil as stress spreads from cash-starved private developers to those with government backing and companies outside the housing sector. Chinese investors pushing back on debt reprieves or unfavorable restructuring plans also suggest dwindling confidence in Beijing’s ability to pull off a fast economic turnaround.

“Sentiment in China’s high-yield market deteriorated on China South City’s surprising extension,” said Ting Meng, senior Asia credit strategist at Australia & New Zealand Banking Group Ltd. “It will be very challenging for developers in the second half as we’re not seeing the real estate sector bottom yet. Even if the industry bottoms, the recovery of HY bonds will be time consuming and painful.”

The day began with China South City Holdings Ltd. proposing changes to its dollar bonds, including extending maturities and paying principal in installments. A slide in the securities -- which were near par just two months ago after a bailout -- has rattled investors who had bet its state links would help insulate it.

Prices of Chinese high-yield dollar notes, a market dominated by developers, have neared record lows this week. While prices of some property notes edged up Thursday on short covering, the absolute levels remain in distressed territory.

The selloff has engulfed even investment-grade peers including China Vanke Co. Another builder previously seen as relatively safe, Country Garden Holdings Co., had trading of one of its yuan bonds briefly suspended Thursday after the security fell 22% to 54 yuan. China’s top-performing mutual fund this year is among a growing list of investors cutting exposure, with major developers like Vanke and Seazen Holdings Co. dropping out of its top ten holdings.

China Bad-Debt Firm Sells Local Bond as Property Bailout Planned

There was some relief later in the day.

The nation’s banking and insurance watchdog pledged that regulators will work with local authorities to ensure delivery of property projects, which have stalled as developers run out of cash.

It’s asking banks to facilitate completion of real estate projects, while China Vanke was also able to sell 3 billion yuan ($444 million) of debt at 3%, the middle of an indicative range. Bonds of Country Garden also jumped.

Repayment risks in China Inc. have spread to unprecedented levels. China South City, which focuses on commercial projects in sectors like logistics, had warned that if the so-called consent solicitation isn’t successful, it might not be able to repay principal or interest on its dollar bonds and that might lead to an event of default.

If the proposed amendments become effective, a Shenzhen entity which in May bought a 29% stake in China South City would enter a type of credit protection called a keepwell deed involving all the dollar bonds. That seemed to be enough to boost the price of the bonds maturing next year at least 8.7 cents, set for the largest gain in months.

But broader concerns persist, as the still deeply distressed price levels reflect. The builder suffered a record drop in the August dollar bond earlier this week, highlighting investor worries about imminent debt deadlines at property firms. Numerous developers this year have sought extensions on local and offshore bond payments.

“Despite property sales improving, developers are finding it difficult to secure financing and continue construction, prompting reports of homebuyers refusing to make mortgage payments,” Goldman Sachs Group Inc. analysts wrote in a risk report. “We believe further policy changes are needed to improve confidence and ensure the issues around mortgage repayments is addressed.”

As the rout in credit markets intensifies, China’s local investors, who have until recently been remarkably receptive to distressed firms’ attempts to delay bond repayments or reorganize debt, are getting impatient.

Brilliance Auto Group Holdings Co., parent of German automaker BMW’s China joint-venture partner, failed to get approval from some creditors on its restructuring plan. The state-run company entered a court-led restructuring in late 2020 after defaulting on some 6.5 billion yuan of obligations.

The creditor revolt came on the heels of bondholders’ rejection of China Evergrande Group’s proposal earlier this month to extend a yuan note, a rare move that may result in a landmark onshore default. The developer, which remains at the epicenter of the property debt crisis, has already suffered dollar bond delinquencies and aims to unveil a preliminary overhaul plan by the end of July.

WITH CHINESE CHARACTERISTICS