Chinese companies suffer from severe liquidity shortage in offshore bond markets
gLOCAL INVESTORS are all too aware of the discount on the valuations of mainland companies due to Xi Jinping’s goal of reducing debt, house prices and inequality in China. Borrowers, for their part, face a “Xi premium” on much-needed capital. The Chinese leader’s policies may have led to a perilous credit crunch for many companies, especially real estate developers, in global markets.
Regulators have shaken the foundations of the Chinese real estate market by tightening the leverage that developers can assume. It pushed Evergrande, a homebuilder with more than 1,000 projects across China and $ 300 billion in liabilities, toward collapse. He missed five payments on offshore dollar bonds in the past month. Several rivals followed suit. Fantasia defaulted on its offshore bonds on October 4. Sinic Holdings said on Oct. 11 that it would likely default soon. Modern Land and Xinyuan Real Estate hope to delay payments on offshore bonds.
This wave of distress led to a tightening of the offshore junk bond market. Spreads (that is, the yields over the risk-free rate) reached almost 17 percentage points, the largest spread on record. The market has largely closed to developers who hope to refinance their debts in October, says Sandra Chow of CreditSights, a research firm. An investment manager at a global institution says even non-real estate companies are valued, noting that “that’s the definition of contagion.”
The problems run much deeper than the chain of missed payments. One of the fears is that Chinese authorities are pushing companies to ignore the interests of creditors and sell offshore assets and siphon money home, in a desperate attempt to ensure that unfinished properties that already have been sold to the Chinese be completed. The dominant theory among investors is that Evergrande is buying time to prevent its offshore assets from being frozen by offshore creditors. A “privately negotiated” resolution on a yuan bond was announced on September 22 to avoid an instant cross default on the dollar bonds. Although the group has since missed dollar bond payments, a 30-day grace period gives the group until October 23 before it is found to be in default and creditors can seize its offshore assets. In the meantime, he’s selling everything he can, including a significant stake in his real estate services unit and offices in Hong Kong.
Other groups might consider a similar strategy. In recent weeks, developers such as Fantasia and Sinic have been reluctant to pay coupons offshore. Some cases have surprised investors, suggesting that companies may be able but unwilling to make these payments, says Arthur Lau of PineBridge, a Hong Kong-based investment manager.
If such behavior is tolerated, if not encouraged, by authorities, the impact could be devastating for the $ 1 billion dollar bond market issued by Chinese companies. Further defaults could arise if yields remain high. After crushing many private conglomerates that were looking to buy overseas assets and hampering sales of Chinese equities in New York City, Xi could now put his mark in the offshore bond market. ■
This article appeared in the Finance & Economics section of the print edition under the title “Xi’s premium”