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It's Make-Or-Break Moment For Property Junk Bonds

It’s Make-Or-Break Moment For Property Junk Bonds

By Ye Xie, Bloomberg Markets live commentator and analyst

Thursday’s news of another missed bond payment by a Chinese developer reminded investors of the struggle homebuilders face, even as the worst of the regulatory tightening is behind. Debt issued by property developers, most of them junk-rated, may soon start to diverge — with the strong credits swimming and the weaker ones sinking. In fact, an S&P Global study shows half the B-rated private developers won’t survive a stress test in the worst-case scenario.

China’s government advisers are proposing a 2022 growth target that’s lower than the 2021 one of “above 6%,” Reuters reported, adding that the new objective could be as low as 5% to 5.5%. While comments from senior leaders call for stabilizing house prices, they fall short of rolling back curbs. All point to a tight lid that will remain on housing markets and any relaxation or easing will be in a gradual, piecemeal manner.

Moody’s cut China’s property sales forecast on Thursday and reiterated a negative outlook for the nation’s housing sector, blaming “strict regulatory controls” that will “constrain … onshore and offshore funding access” and lead to “defaults, declining sales and rising investor aversion.” Contracted property sales are expected to fall 5%-10% in 2022 versus a prior projection range of flat to a 5% drop.

Against such a policy backdrop, developers’ fortunes could soon start to diverge. Some Chinese developers are seeing the light at the end of the tunnel, rushing to raise funds in the onshore bond market after private-sector homebuilders issued the least amount of yuan notes in five years. Investors including T. Rowe Price Group Inc., Allianz Global Investors and Goldman Sachs Asset Management are starting to tap opportunities selectively.

Meanwhile, those with poor finances continue to suffer. The latest victim is Shenzhen-based Kaisa Group Holdings Ltd., which has yet to pay interest due Wednesday on a dollar bond, two note holders said. The firm had to make a $17.5m coupon payment on $300m note due 2026, Bloomberg data shows. There’s a 30-day grace period before a default can be declared.

S&P’s research showed that half of the B-rated developers cannot meet their debt obligation within a year.

The default rate for Chinese junk bonds is expected to fall from 13.6% this year, but will remain high at 9.7% in 2022 due to property sector troubles, JPMorgan wrote in a client note. JPMorgan favors BB-rated high-yield bonds, betting that the developers will survive and yields in mid-teens are juicy enough. For B-rated notes, the bank sees markets mostly pricing in “selected defaults” and others should eventually recover once the fear subsides.

Tyler Durden
Thu, 12/02/2021 – 21:20

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