International investors have sold their junk-bond holdings of Chinese property developers, driving borrowing costs to a decade high and further restricting the capacity of cash-strapped developers to access critical funding.
The average yield on an ICE Data Services index of Chinese high-yield dollar bonds, which property companies dominate, surged to close to 30 percent recently, up from 14 percent at the beginning of September, according to Financial Times. The surge has pushed the leading barometer of borrowing costs to its highest level since the 2008 global financial crisis.
Junk bonds, also known as high-yield bonds, refer to those with credit ratings lower than investment grade—BB-plus or lower by S&P Global Ratings and Fitch Ratings or Ba1 or lower by Moody’s Investors Service. They’re deemed more likely to default, but could offer investors a better payoff for the risk.
The huge rise in borrowing costs, coupled with regulatory pressure to cut back on debt, has given these developers even more challenges in accessing capital and avoiding defaults.
Chinese property developers rely on a continual stream of home sales to generate revenue. However, the real estate market has slowed significantly in recent months, putting pressure on housing prices. According to China’s National Bureau of Statistics, residential sales tumbled by 17 percent in September—traditionally a peak season for the home market—following a 19.7 percent drop in August.
Evergrande, the world’s most indebted property developer with $300 billion in liabilities, escaped default once again by making a $148 million interest payment on three dollar-denominated coupons minutes before the 30-day grace period was set to default on Nov. 10. Evergrande initially alerted global markets to the issues across China’s real estate industry when it missed offshore bond payments in September. But the company is far from the only Chinese property developer bouncing from one grace period to the next.
Kaisa Group, one of the sector’s largest borrowers in international bond markets, might soon join a growing list of companies that have missed interest payments ahead of two looming deadlines on its offshore debts. The company recently missed a payment on a wealth-management product and asked investors to “give a bit more time and patience.”
“I think probably we’re going to see more defaults down the road, and more contagion to other developers,” Larry Hu, chief China economist at Macquarie, told Financial Times.
Thus far in the fourth quarter, Chinese real estate companies have earned only $320 million from offshore bond sales, far less than the billions of dollars generally raised during the period. While the bond selloff initially focused on those developers with lower credit ratings, it has recently extended to include financially stronger developers, many of which are also experiencing declining sales.
Shimao Group, one of China’s major developers, was downgraded to junk status by S&P Global Ratings on Nov. 10, citing “challenging operational conditions” as a reason that sales would be lower than forecasted.
Shimao was downgraded by S&P one notch to BB-plus, with a negative outlook. Shimao’s contracted sales fell by 32 percent in October year-over-year.