China’s property-bond market remains deeply distressed on a lack of trust

From WSJ

By Rebecca FengMarch 3, 2022 6:06 am ET

After more than 10 dollar-debt defaults by property developers over the past year, many investors have come to the conclusion that trust is broken in the $200 billion market for high-yield bonds of Chinese companies.

Since last summer, when the financial troubles of China Evergrande Group sparked a selloff in the giant property company’s bonds and those of its peers, the market has remained deeply distressed, with no end in sight to the malaise. A string of easing measures from Chinese authorities, local governments and banks to support the housing market and help developers access funding onshore have so far done little to change the mood in the market. China’s top 100 developers’ monthly contracted sales volume fell for the eighth straight month in February, plunging 47% from a year earlier, figures from Chinese data provider CRIC showed.

For much of the past five months, the average yield on Chinese developers’ dollar bonds has been above 20%, making it too expensive for most companies to raise fresh funds to pay off maturing debt. To complicate matters, several developers that earlier claimed to have ample liquidity to repay their debts surprised investors by reneging on their statements without warning, damaging bondholders’ already-fragile confidence in the transparency and truthfulness of companies’ disclosures.Yield-to-maturitySource: ICE Data ServicesNote: Shows the ICE BofA Asian Dollar High Yield​Corporate China Issuers Index and the ICE BofA​Global High Yield IndexChinese high-yield dollar bondsGlobal high-yield bondsMarch 2021’22051015202530%

“Trust takes time to build but takes just one step to destroy,” said Freddy Wong, head of the Asia-Pacific region for Invesco’s fixed-income business. Investors were willing to lend to developers that deliver on their promises, but once that trust is broken, it would be “almost impossible” to mend, he said.

Since the beginning of 2021, Chinese developers have defaulted on $8.8 billion of offshore dollar bonds and the equivalent of $5.1 billion of onshore yuan-denominated bonds, dwarfing the total amount of defaulted bonds in previous years, according to Fitch Ratings.

The latest negative surprise came from a small Chinese developer called Zhenro Properties Group Ltd. Foreign investors were caught off guard in late February when the Shanghai-based company U-turned on an early-January promise—laid out in a Hong Kong stock-exchange filing—to redeem a $200 million perpetual bond on March 5. Zhenro also assured investors that it had the equivalent of a $1.4 billion credit line from Bank of China, a large state-owned lender.

All seemed well until online speculation bubbled on Feb. 11 that Zhenro wasn’t going to redeem the bond as planned. Amid a deep selloff in its shares and dollar bonds, the firm publicly dismissed the rumor as “untrue and fictitious” via another exchange filing. Days later, Zhenro asked investors for consent to delay the redemption by a year. Its perpetual bonds were recently bid at 22% of their face value, versus more than 92% on Feb. 9, according to Tradeweb data.