Festering Evergrande contagion worries push China spreads to record (updated)

Modern Land (China)

13/10/2021 08:03

(Recasts, updates market prices, adds comment)
    By Andrew Galbraith
    SHANGHAI, Oct 13 (Reuters) - Worries over possible
spiralling effects of a debt crisis at developer China
Evergrande Group  3333.HK  drove Chinese high-yield spreads to
record highs on Wednesday, days after the company missed another
dollar bond deadline.
    The company, which has more than $300 billion in
liabilities, on Monday missed its third round of interest
payments on its dollar bonds in three weeks even as other firms
warned of defaults.
    In the clearest sign yet of global investors' worries of
spreading debt contagion, the option-adjusted spread on the ICE
BofA Asian Dollar High Yield Corporate China Issuers Index
 .MERACYC  surged to a fresh all-time high of 2,337 basis points
on Tuesday evening U.S. time, above a previous top of 2,069
basis points on Friday.
    Investment grade spreads also jumped to their widest in more
than two months.  .MERACCG  
    "We see a risk that a disorderly correction in the property
market could cause sharp price declines, hitting the personal
wealth of homeowners," Kim Eng Tan, a credit analyst at S&P
Ratings, said in a report.
    "Such an event could also contribute to large-scale losses
by investors in wealth management products, and the contractors
and service firms that support the developers."
    Evergrande did not pay nearly $150 million worth of coupons
on three bonds due on Monday, following two other missed
payments in September.
    While the company has not technically defaulted on those
payments, which have 30-day grace periods, investors say they
are expecting a long and drawn-out debt restructuring process.
 urn:newsml:reuters.com:*:nL1N2R80H9
    Chinese property companies' bonds continued to fall on
Wednesday, comprising seven of the top 10 losers among
Shanghai-traded corporate bonds.
    Bonds issued by developers including Shanghai Shimao Co Ltd
 600823.SS  China Aoyuan Group  3883.HK  and Country Garden
Properties Group fell between 1.6% and 7.4%, according to
exchange data.
    Dollar bonds also fell, although traders said limited market
liquidity following earlier routs meant prices were only
indicative, with tradeable prices possibly 10-20 points lower
than screen prices.
    Marketaxess quoted a Kaisa Group Holdings  1638.HK  June
2026 bond as falling 0.9% to 41.125 cents.  XS234758187=1M  Its
yield has risen to around 40%.
    In equity markets, a sub-index tracking A-shares of property
firms  .CSI000952  fell 0.7% against a 1.2% rise in the
blue-chip CSI300 index  .CSI300 .
    Markets in Hong Kong were closed on Wednesday due to a
typhoon affecting the city.  urn:newsml:reuters.com:*:nL1N2R900P
    
    WALL OF DEBT
    Evergrande's main unit, Hengda Real Estate Group Co, faces a
121.8 million yuan onshore bond coupon payment on Oct. 19 and
Evergrande has another $14.25 million dollar bond coupon due on
Oct. 30.  urn:newsml:reuters.com:*:nL8N2QP1H5
    Debt pressures extend far beyond Evergrande. Chinese
property developers have $555.88 million worth of high-yield
dollar bond coupons due this month, and nearly $1.6 billion due
before year-end, and Refinitiv data shows at least $92.3 billion
worth of property developers' bonds maturing next
year urn:newsml:reuters.com:*:nL1N2R80FT
    Evergrande's mid-sized rival Fantasia  1777.HK  has also
already missed a payment and Modern Land  1107.HK  and Sinic
Holdings  2103.HK  are trying to delay payment deadlines that
would still most likely be classed as a default by the main
rating agencies.
    "These stories have challenged the notion that Evergrande is
one of a kind," analysts at Capital Economics wrote in a note.
    While China's policymakers will likely be able to avoid a
"doomsday scenario", the overextended property sector will
continue to weigh on the world's second-largest economy, they
said. 
    "Even following an orderly restructuring of the
worst-affected developers with minimal contagion to the
financial system, construction activity would still almost
inevitably slow much further."
    The IMF said on Tuesday that China has the ability to
address the issues linked to Evergrande's indebtedness, but
warned that an escalation of the situation could lead to the
emergence of broader financial stress.  urn:newsml:reuters.com:*:nL1N2R80WR
    The $5 trillion Chinese property sector, accounts for around
a quarter of the Chinese economy by some metrics and is often a
major factor in Beijing policymaking.

 (Reporting by Andrew Galbraith; Editing by Muralikumar
Anantharaman and Kim Coghill)
 ((Andrew.Galbraith@tr.com; +86 21 2083 0079; Reuters Messaging:
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