Confidence Crisis around Evergrande has Spread to Numerous Real-estate Firms

Confidence Crisis around Evergrande has Spread to Numerous Real-estate Firms

By Quentin Webb and Frances YoonNov. 8, 2021 6:41 am ET WSJ

What began early this summer as a confidence crisis around industry giant China Evergrande Group has spread to numerous real-estate firms that are now at much higher risk of reneging on their debt. At least four developers have defaulted on dollar bonds since September.

“Market sentiment is still very weak,” said Jenny Zeng, co-head of Asia Pacific fixed income at AllianceBernstein.

“The key question is, who has sufficient liquidity to muddle through this?” she added—meaning which companies can repay near-term maturities until the market revives due to new inflows, or the Chinese government introduces supportive measures.

The surging yields imply very high default risks, and are themselves adding to developers’ problems, by making it hard or impossible for companies to refinance by issuing new debt.

“It is a surprise how much even high-quality companies are being impacted,” said Jim Veneau, head of fixed income for Asia at AXA Investment Managers. “There’s no doubt that market distress is starting to become a factor in and of itself for companies,” he added.

Kaisa Group Holdings Ltd. , one of the property industry’s biggest borrowers in international bond markets, is one of the recent casualties, with its bonds and shares both selling off since the end of September. The company defaulted in 2015, when defaults by Chinese companies were much rarer, but had since regained access to international markets.

Kaisa said last week that a wealth-management product that it guaranteed had missed a payment, and it was working on a payment plan for that investment vehicle. Kaisa said it was facing unprecedented liquidity pressure, amid credit-rating downgrades and a “harsh environment in the property market.” It halted its stock from trading as of Friday morning, and its dollar bonds due in 2024 were recently bid at about 29 cents on the dollar.

Mr. Veneau at AXA said investors were concerned that other developers could also be on the hook to repay similar debts. “It seems some of these wealth-management products haven’t previously been disclosed or properly communicated. The impression is that there have been surprises, that there could still be new revelations that there have been WMP commitments,” he said.

Shimao Group Holdings Ltd. has also come under market pressure. Late Friday, the company denied reports that it was overdue in repaying debt due to a nonbank lender. Shimao said reports that a subsidiary was in talks with a nonbank lender, Lujiazui International Trust Co., to extend its payment schedule were untrue.

Shimao’s management told an investor conference call that it would be a big problem for the industry if restrictive policies continue and refinancing remains closed, according to Leonard Law, a senior credit analyst at Lucror Analytics. Shimao also cut its target for this year’s contracted sales, Mr. Law wrote in a note to clients, to about 290 billion yuan, the equivalent of about $45.3 billion, from an earlier target of 330 billion yuan.

Shimao’s $1 billion, 5.6% bond due 2026 was quoted at less than 65 cents on the dollar on Monday afternoon in Hong Kong, according to Tradeweb, down from about 88 cents a week earlier

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Harvey Yan

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