The crisis in China’s property market has hammered bond prices and curbed sales of new debt
An Evergrande construction site in Beijing.
PHOTO: ANDREA VERDELLI/BLOOMBERG NEWS
By Serena Ng
May 16, 2022 5:30 am ET
Once the place to be for yield-seeking global investors, Asia’s
junk-bond market has shrunk drastically and new debt issuance has slowed to a
trickle.
Less than 18 months ago, the dollar-bond market for
noninvestment grade companies from China to Indonesia was booming. It neared $300
billion in size, thanks in large part to numerous bond sales by Chinese
property developers such as China Evergrande Group. EGRNF 7.14%
Since then, a spate of defaults and a massive selloff have
resulted in big losses for investors, erasing more than $100 billion in value
from one widely watched bond index. The total market value of Asian high-yield
bonds—excluding defaulted debt—is now about $184 billion, according to data
from Bloomberg and Barclays Research.
“This is completely unprecedented, especially for Asia credit
markets,” said Avanti Save, managing director, Asia credit strategy at
Barclays.
Ms. Save said the entire high-yield Chinese property sector was
trading as if it were in financial distress; 60% of the bonds of developers
that haven’t defaulted are trading at under 40 cents on the dollar.
While investors have recoiled from all manner of riskier
assets this year, including fast-growing technology stocks and U.S. junk bonds,
the problems in Asian’s high-yield market are distinct and longer-running.
The market’s comedown followed years of rapid growth. Chinese corporate borrowers, including real-estate companies such as Evergrande and Kaisa Group, took advantage of low interest rates and funds flowing into the region to raise large amounts of dollar funding. In January 2020, Evergrande and a key subsidiary sold $6 billion of bonds in a few days, pointing to the market’s growing depth.
Selloffs continued to
batter major U.S. stock indexes, with the S&P 500 entering bear-market territory
Friday for the first time in more than two years. WSJ’s Caitlin McCabe looks at
some of the key causes behind the market volatility. Photo: John
Minchillo/Associated Press
Money managers including BlackRock Inc., Pacific
Investment Management Co. and UBS Asset Management had also promoted the merits
of investing in Asian high-yield bonds, favoring the assets for their
attractive returns and low historical
default rates relative to junk bonds in the U.S. and other parts of the
world.
That all changed after Chinese regulators imposed limits
on developers’ leverage, which forced Evergrande and some of its peers to curb
their borrowing activities. Housing sales began to dry up too, and a funding
crunch ensued. Investors dumped
many developers’ junk bonds, sending prices tumbling and yields soaring.
Evergrande and Kaisa defaulted
on their dollar debt in December, the two largest among more than two dozen
Asian high-yield issuers that have defaulted on their international debt since
the start of 2021, according to Goldman Sachs data.
When companies default, their bonds are removed from global bond
indexes, reducing the benchmarks’ total face value and market value.
The yield on a widely followed ICE BofA index of Asian high-yield
dollar bonds was recently 15.1%, versus 7.8% a year ago. That yield was 23.6%
for a similar index for Chinese companies. The broader universe also includes
junk-rated sovereign bonds from countries such as Pakistan and Sri Lanka, as
well as bonds issued by Asian energy companies and Macau casino operators.
Chinese companies’ debt made up more than half of Asia’s
junk-bond market a year ago. Now, it makes up a much smaller proportion of the
Asia high-yield market. “It’s hard to replicate the contribution that China
property had,” said Sandra Chow, co-head of Asia-Pacific research at
debt-research firm CreditSights. She added that more defaults could occur
before the market’s bottom is found.
The fallout has also affected demand for new bond deals. In the
year through May 10, Asian high-yield issuers sold just $2.5 billion in debt,
down 90% from $24.2 billion in the same period in 2021, according to Dealogic.
That compares with a 73% year-over-year decline in U.S. high-yield issuance,
the data shows.
Rishi Jalan, Citigroup Inc.’s Asia debt
syndicate head, said that while there have been some recent bond deals from
renewable-energy companies in India, overall investor demand in the high-yield
market has been relatively weak.
“Investors have been feeling the pain in China real estate, and
it’s repricing everything,” Mr. Jalan said, adding that the headwinds could
take a while to dissipate.
He said present yields—coupled with rising U.S. interest
rates—have made it uneconomical for many corporate borrowers to sell new dollar
bonds. Some companies have hence decided to raise funds in other ways, such as
via the private loan market.
Amy Kam, a senior portfolio manager at Aviva Investors in London and
a veteran in Asian credit, said she remains hopeful that conditions in Asia’s
high-yield market will improve.
“There will be
survivors,” she said, referring to China’s property sector and its importance
to the Chinese economy. “We are trying to stay with the stronger companies that
we think can withstand the downturn.”
So if a Chinese company is allowed to raise capital in the Wall Street market, but if this Chinese company falls bankrupt, debt... will Americans lose money?
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