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China Evergrande debt woes raise financing pressure on peers

EconomySep 13, 2021 07:06PM ET
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© Reuters. FILE PHOTO: An exterior view of China Evergrande Centre in Hong Kong, China March 26, 2018. REUTERS/Bobby Yip/File Photo

By Andrew Galbraith

SHANGHAI (Reuters) -China Evergrande Group's struggles to quickly sell off assets and avert defaulting on its 1.97 trillion yuan ($305.3 billion) in liabilities is raising the risk of contagion for other privately-owned developers, fund managers and analysts say.

Worries over the country's No.2 property developer's ability to make bank loan interest and wealth management product payments have led to a worsening sell-off in its bonds and shares in the past week.

Evergrande's offshore bonds have dropped to less than a quarter of their face value, trading of its onshore bonds has been paused, and a stock price rout has deepened, knocking more than three-quarters off its market capitalisation this year.

"Telling property guys to de-leverage so quickly is like telling a 900-pound guy to drop to under 100 pounds," said a fixed income asset manager who declined to be identified due to sensitivities around the issue.

"It won't be the obesity that kills him, but the process of losing so much weight (so quickly)."

With about $20 billion in outstanding offshore bonds, Evergrande is one of the world's biggest emerging market issuers of dollar debt, and the company's woes have driven an index of Chinese high-yield dollar issuers to 16-month lows.

S&P Global (NYSE:SPGI) Ratings said bond market volatility will exacerbate some developers' efforts to refinance, adding that its rated developers were due to repay 480 billion yuan worth on onshore and offshore maturities over the next 12 months.

Privately-owned developers Guangzhou R&F Properties Co and Xinyuan Real Estate Co, downgraded this month over concerns they will struggle to repay debts, have seen yields on their bonds surge above 30% in a sign of weakening access to market funding.

Evergrande vowed on Friday to repay all of its matured wealth management products as soon as possible, which lifted its dollar bonds, but analysts see more difficulties ahead.

"The property sector is under pressure and some developers are under the risk of bankruptcy...the bond market is reflecting that reality," said Larry Hu, economist at Macquarie Capital in Hong Kong. "We're going to see more developers go bankrupt in the coming months."

Evergrande's debt pains after years of aggressive expansion come amid a sweeping clean-up of the property market that has formed a key pillar of Beijing's new campaign of "Common Prosperity", which many observers have seen as a return to China's socialist roots.

But while private homebuilders struggle, steady onshore credit spreads indicate Chinese investors remain unconcerned for now about risks spilling into the broader banking system.

"Contagion from Evergrande to other developers will be clearer for high-yield and private debtors. The impact on state-owned developers and banks is limited as far as bond prices are concerned," economists at Natixis said in a note.

February 2023 dollar bonds of state-owned developer Poly Developments and Holdings Group Co were trading at a premium of nearly 3% to their face value on Monday, yielding 1.78%.

($1 = 6.4505 Chinese yuan)

China Evergrande debt woes raise financing pressure on peers

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