International bond sales by Chinese developers have all but halted as the crisis at China Evergrande stokes fears of defaults across the country’s property sector, throttling a crucial driver of Asia’s high-yield debt market.
Just one developer has managed to tap overseas bond investors since Evergrande, the world’s most indebted real estate group, missed an $83.5m interest payment last month, rattling global markets.
The $102m bond sale by Helenbergh China Holdings this month has done little to address huge funding shortfalls among heavily leveraged property groups. Issuance of high-yield dollar debt is down 28 per cent from a year ago, according to data from Dealogic.
Bankers and investors said conditions were likely only to worsen without intervention from Beijing.
“The market really has turned quite gloomy,” said a senior debt capital markets banker at one European bank, who estimated that a third of the approximately 60 Chinese developers with outstanding dollar debt could end up permanently frozen out of international finance, further weakening deal flow.
The banker added that while investors had been braced 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 tracking Chinese corporate issuers in Asia’s high-yield bond market demonstrates the scale of market contagion. The effective yield on the index has shot up to 24 per cent this week from 10 per cent in June, after fears of defaults spiralled across the developer property sector.
A broader index for all Asian high-yield debt, where Chinese developers are among the biggest borrowers, is trading at 15 per cent, compared with 12 per cent at the end of September.
Analysts at credit rating agency Fitch estimated that outstanding cross-border bond issuance by China’s real estate sector totalled $232bn at the end of September, almost a third of which is expected to mature before the end of next year. They attributed a rise in funding costs for Asian high-yield debt issuers in the third quarter primarily to “ongoing negative news concerning China Evergrande’s operations and potential default”.
“International investors are probably used to more aggressive, intervention-style 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’re getting tai chi.”
Bankers and investors said issuance could return promptly if China stepped up policy support and encouraged lending to developers — or it could stall for months, threatening to stall vital refinancing deals across the sector.
One Hong Kong-based portfolio manager suggested that the threat of contagion to lenders that financed property groups would force policymakers to act soon.
“This could last a month, but I don’t see it lasting three or four,” the portfolio manager said. Chinese authorities “want to…
Read More: Evergrande crisis leaves Chinese developers shut out of global debt