Deep concern at Evergrand has sparked sales in the debt 428 billion corner of the Asian debt market, highlighting how the Chinese property developer crisis is spreading to other assets as traders and investors prepare for a crucial payment deadline on Thursday.
According to the Ice Data Services Index, the yield on US dollar-denominated bonds issued by risky Asian orrow recipients this week rose to about 12 percent, the highest level since the early stages of the coronavirus epidemic.
The shake came from 7 percent at the start of the year as traders were worried about a possible collapse if Evergrande began paying off its billions of dollars of payments on the international market.
Failure to pay interest on one of its offshore dollar bonds on Thursday could trigger China’s biggest debt restructuring of all time. This would mark the deadliest push so far across a market where international asset managers were tempted by profitable returns as global bond yields came close to historic lows.
The Evergrand crisis is partly caused by Beijing’s massive crackdown on Chinese property developers taking over Beijing, the dominant issuer of dollar-denominated high-yield debt in Asia, which is now facing a domestic recession.
It will be “It’s just a disturbance to think about [property] The market is unlikely to see the effects of second-order and third-order. . . Especially in the capital markets and bond markets, ”HSBC chief executive Noel Quinn told a Bank of America conference on Wednesday.
Evergrand’s liquidity crisis represents the latest regulatory risk for global investors in the world’s largest emerging market, a chaotic year that has already imposed unprecedented sanctions on the country’s technology and education sectors.
“So far, as far as I understand, the coastal scene outside of China, including Hong Kong and the United Kingdom, is a concern,” said Stephen Jane, chief executive of Uregon SLJ Asset Management. “It’s a consequence of all the amazing regulatory measures that have come on the market.”
Another major international fund manager in London says they are immersed in questioning about coming into contact with Evergrand this week.
The company, which owes about 20 20 billion in dollar-fixed debt, faced 83 83.5 million in interest payments on Thursday. As of its most recent filing in June, emerging market expert Ashmore was the largest single holder of bonds with $ 63 million in shares, while other major investors as of July included UBS and HSBC.
A team of offshore investors in Evergrande hired law firm Kirkland & Ellis and investment bank Moilis this month to advise on a possible restructuring.
The five-year bond, which pays a “.25 percent regular“ coupon ”payment and was issued in 2017 when Evergrand’s chair Hui Ka Yan was crowned China’s richest man, quickly sold out. It is trading at 25 cents on the dollar, a highly volatile level, close to its equivalent in early June. If a payment is missed, EverGrand will have a grace period of -0 days before an official default occurs.
On Wednesday, Evergrande said the interest payment of Rmb232m (35.9 million) for an unsecured bond on Thursday had also been “resolved through off-exchange negotiations”, but did not specify when or how much it would pay.
According to Bloomberg data, on Thursday morning, the People’s Bank of China invested a net Rmb110bn in the country’s financial system, the biggest liquidity increase in eight months.
The developer has been trying to avoid a liquidity crisis for months, but has struggled to raise enough cash to reduce its deficit by continuing to pay suppliers, creditors and retail investors who descended on its Shenzhen headquarters last week.
The yield of Chinese property developers has increased in recent weeks due to the severity of the cash crisis in Evergrand, with the yield of the ice index adding only 2 percentage points this month. 422 percent of the real estate market, mostly coming from China.
“There’s a lot of negativity in prices,” said Paul Lukaszewski, head of corporate debt at Asia-Pacific at Aberdeen Standard Investments. He estimated that current prices meant that about 30 percent of China’s high-yielding issuers would default to B, which is considered high-risk.
The overall Asian corporate high-yield market has more than doubled from just $ 169bn in 2014, JPMorgan data shows. Although most of the investment comes from Asia, prominent international funds are also big players in the market, which is one of the direct routes to offshore investment in China’s tightly regulated financial system.
“Global funds have invested a lot in this sector because it is high yielding,” said a Hong Kong banker. He added that although Evergrande “always had a name that many people were very uncomfortable with”, some investors had to “expose” due to inclusion in global bond indices, re-grading the performance of fund managers.
Funds managed by HSBC and BlackRock bought Evergrand bonds in July and August, respectively, and increased their holdings this year as they expanded in size.
Although Evergrande has brought China’s tough campaign against real estate into the spotlight, the pressure is mounting year after year. In 2018, the government stated that the proceeds from the offshore orrowing should be used to reschedule existing refinancing instead of investing.
Concerns over refinancing have hit other developers with the dollar’s tsunami, including the Fantasia Group, which was downgraded last week, and Guangzhou R&F. Failure to refinance in the event of a recession in the construction of new homes could also cause economic concern in China.
In addition to the high yields on offer, investors have been attracted to Chinese assets because of the perception that they are weakly connected to global markets. Lukaszewski suggested that the appeal of the overall high-yield market in Asia was that it “goes ahead on its own beat, and that beat is a local cause”.
Jane added: “Sitting in London, just imagine a situation where something happens in the United States and everyone in China is terrified of what has happened … where American investors are very quiet. Just think about this contrast … which party is right. Maybe? “
Additional report by Attracta Muni in London