Investors are pricing in a $130 billion loss in Chinese developer dollar bonds

Investors estimate nearly $130 billion in losses on Chinese property developers’ dollar debt due to growing fears that the country’s housing market will face a prolonged crisis unless Beijing intervenes with a large-scale bailout.

Two-thirds of the more than 500 dollar outstanding bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for a distressed state, according to a Financial Times analysis of Bloomberg data.

The increased pressure on the market comes after a year Evergrandethe world’s largest debt developer, has begun sliding into default, unleashing turmoil across a sector responsible for nearly 30 percent of the country’s annual economic output.

Beijing’s response was limited to additional measures, including a cut this week On the mortgage lending rate. But analysts said policymakers’ refusal to launch a blanket bailout could only add to the ultimate cost of bailing out the industry and could exacerbate spillovers to global markets and trade as Chinese growth slows.

“With industry headwinds and negative news, it is very clear that many developers are overseas [dollar] “Bond prices have fallen sharply since last year,” said Cedric Lay, chief credit analyst at Moody’s Investors Service. “We continue to believe that defaults will persist through the remainder of 2022, especially for developers with large debt maturities offshore and poor sales.”

Many developers’ dollar bonds are now priced at a level that carries a very high risk of default. One of the Sept. 7 bonds issued by Kaisa Group, one of the first in the sector to go dollar-denominated late last year, has a price of $0.09 to the dollar, implying a loss of about $272 million on a $300 million principal. A bond of the same size from Shanghai-based Shimao that matures in just over a year is priced at just under $0.10 on the dollar, indicating a potential loss of $268 million.

In all, investors have priced in nearly $130 billion in losses on more than $200 billion in dollar bond payments owed by China. Real estate Collections, reflecting a discount of approximately two-thirds of the assumed market value if all payments were made successfully.

Real estate groups in China defaulted on payments on $31.4 billion in dollar bonds in 2022. Companies have faced particular pressure due to maturity walls, with many developers expected to repay principal, or the amount they initially borrowed, in one go. . Companies often seek to convert loans into newly issued debt to extend these maturities, but market turmoil has made this nearly impossible for most issuers.

The drumbeat of defaults is the result of what one veteran investment banker in Hong Kong described as a “perfect storm” for developers, who must try to refinance to stave off more missed payments as they struggle to allay growing skepticism among Chinese homebuyers and top leaders in Beijing.

“There is good reason for these bonds to be trading at distressed levels,” said the banker, who heads the Asia debt syndicate at a major European bank. “The odds of a lot of these guys repaying is anyone’s guess.”

Investors initially hoped the worst pressure would be confined to the most indebted groups, such as Evergrande, which have become more reliant on pre-sales of unfinished housing in recent years in response to a crackdown on excessive leverage in the sector.

But stalled construction on projects in Evergrande and a handful of high-risk developers has raised broader concerns among the general public that other groups may go bankrupt before the homes are finished selling. This triggered a crisis of confidence that choked off sales revenue and threw large sectors of the industry into a liquidity crunch.

“Perhaps a more centralized bailout is the necessary solution here,” said Robin Xing, chief China economist at Morgan Stanley, of the looming crisis in the country’s housing market.

Xing said a Beijing-led rescue plan to address a funding gap of up to 1 trillion renminbi ($146 billion) for unfinished housing projects would require “very strong political capital” and that the problem would get worse the longer policy makers wait to intervene. Six months, this gap could widen dramatically if you don’t stop the downward spiral.”

Line chart of Chinese high-yield total return index in Asian dollars showing Chinese developers' dollar bonds affected by punishing selloff

The widespread shutdown of pre-sold homes has prompted hundreds of thousands of homebuyers across China to join across the country. boycott mortgage paymentsWhich analysts said undermined confidence in the industry.

“The whole situation is increasingly out of control,” said Rosealea Yao, real estate market analyst at Gavekal Dragonomics, a consultancy. “At this time last year, no one expected what we see today from the mortgage boycott and construction suspension. A year from now, we may face a worse situation.”

Official figures show that home sales in China fell nearly 30% in the first half of the year to around 6.6 trillion renminbi. Andy Swain, portfolio manager and former head of Asian-Japanese credit research at PineBridge Investments in Hong Kong, said policy support for the sector “has been insufficient in terms of property market stability, if you look at the sales figures”.

“The weaker names in the sector have already faltered and now the problem is spreading to the higher quality names,” he added.

Even Chinese state-run investment banks have tried to weed out their holdings of developer dollar debt – but staff at the banks’ international arms said they struggled to get timely approval for sales from Beijing. “Every time approval arrives, the bonds collapse further, forcing us to hold them until we can place another order,” said a Hong Kong product manager at a state bank.

Those accidents left almost all Chinese real estate groups Frozen from the international bond market, which limits its ability to refinance and increases the risk of default. Data from Dealogic shows developers’ issuance of dollar bonds has fallen 80 percent in the year so far to just $7.2 billion, on track to achieve the lowest level of annual sales in a decade.

Column chart of real estate group dollar bond sales (billion dollars) showing that Chinese developers are still out of global bond markets

With $17.6 billion in dollar bond payments still due this year and another $47 billion in 2024, there is little hope among analysts for any meaningful rebound in sales this year that could help foreign bondholders out of more defaults.

Yao, at Gavekal, predicted a 15 percent drop in annual property sales this year and a 33 percent drop in construction starts, with further contraction inevitable unless policymakers resolve the predicament over previously sold homes.

“The government needs to show that at the end of the day, all these families can have a home,” Yao said. “If they can’t do that, it will be very detrimental to future home purchases.”

Policymakers have been reluctant to publicly discuss the size or timing of any bailout, even though the central bank, the housing regulator and the Treasury have Undertaking to provide private loans through bank policy To ensure the delivery of real estate projects to buyers.

But investors said the measures were either too limited in scope or, in the case of China’s sudden mortgage lending rate cut this week, unable to restore confidence among homebuyers in previously sold homes.

“I don “t think so [policymakers] “They realize it’s not enough,” said one veteran fixed-income investor in Hong Kong. “You need some big bazooka action to improve morale as a whole.”

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