China’s Bond Markets Slump Again as New Evergrande Deadline Passes

By Reuters
October 11, 2021 Updated: October 11, 2021

SHANGHAI/LONDON—Chinese property firms’ bonds were hit with another wrecking ball on Oct. 11 as Evergrande looked set to miss its third round of bond payments in as many weeks and rivals Modern Land and Sinic became the latest scrambling to delay deadlines.

High-yield Chinese bond markets were being routed once again as fears about fast-spreading contagion in the $5 trillion sector, which drives a sizable chunk of the Chinese economy, continued to savage sentiment.

Weary investors had been holding out little hope that Evergrande would suddenly stump up Oct. 11’s near-$150 million of coupon payments, but the fact that bondholders said they hadn’t received anything this time either just bolstered expectations for a full-scale default.

Once China’s largest developer, the firm has more than $300 billion in liabilities that are now at risk.

Other signs of stress included smaller developer Modern Land asking investors to push back by three months a $250 million bond payment due on Oct. 25 in part “to avoid any potential payment default.”

Sinic Holdings said it too was likely to default next week as it doesn’t have enough financial resources to make its remaining bond payments this year. It has one at the start of next week, although that bond was already down 75 percent.

Modern Land’s April 2023 bond, with a coupon of 9.8 percent, plunged more than 25 percent to 32.25 cents on the day, according to financial data provider Duration Finance, while the company’s shares have lost a third of their value over the past month.

Kaisa Group, which in 2015 was the first Chinese property developer to default, also saw some of its bonds slump to well under half their face value. R&F Properties and Greenland Holdings, which both have prestige projects in global cities such as London, New York, and Sydney, were also widely sold.

“It’s a disastrous day,” said Clarence Tam, fixed income portfolio manager at Avenue Asset Management in Hong Kong, highlighting how even some supposedly safer “investment grade” firms had now seen 20 percent wiped off their bonds.

“We think it’s driven by global fund outflow … Fundamentally, we are worried the mortgage management onshore hits the developers’ cash flow hard,” he added, referring to concerns people could stop putting deposits down on new homes.

Analysts at JPMorgan also highlighted how international investors are now demanding the highest ever premium to buy or hold ‘junk’-rated Chinese debt.

There is now a whopping 1,200 basis point difference between the bank’s closely followed JACI China high yield index and a similar index of investment-grade AA-rated local Chinese market bonds, known as “onshore” bonds.

“Evergrande’s contagion risk is now spreading across other issuers and sectors,” JPMorgan’s analysts said.

Another London-based analyst who asked not to be identified said: “Slowly and gradually, we are seeing the rest of the Chinese property sector fall apart.”

Shaky Foundations

In equity markets, the Hang Seng Property and Construction sub-index fell 0.4 percent against a nearly 2 percent rise in the broader index.

Fantasia Group China Co., whose controlling shareholder is Fantasia Holdings, said on Oct. 11 it would adjust the trading mechanism of its Shanghai-traded bonds following credit downgrades by China Chengxin International Credit Rating Co. (CCXI).

Fantasia had appointed advisers on Oct. 8 after it shocked markets by missing a bond payment earlier in the week. It saw its bonds dive from almost 100 cents on the dollar to just 20 cents, as just a couple of weeks earlier it had said its liquidity was fine.

The cash-strapped property developer’s troubles and contagion worries have sent shockwaves across global markets and the firm has already missed payments on dollar bonds, worth a combined $131 million, that were due on Sept. 23 and Sept. 29.

Advisers to offshore bondholders said on Oct. 8 they hadn’t yet heard from Evergrande, and are also demanding more information about the firm’s plan to divest some businesses, worried a potential fire-sale could ultimately leave them with less.

Trading in shares of Evergrande, as well as its Evergrande Property Services Group unit, has been halted since Oct. 4 pending a major deal announcement.

By Andrew Galbraith and Marc Jones