Evergrande crisis leaves Chinese developers out of global debt market

Dollar debt issuance by Chinese real estate developers has come to a near standstill as the escalating Evergrande crisis cuts other real estate firms’ access to global capital markets.

Year-to-date high-yield dollar bond issuance by Chinese developers is down 97% compared to the first quarter of 2021, according to Financial Times calculations based on Refinitiv data.

So far, only two deals worth less than $295 million have been closed, compared with more than $8.7 billion raised in the first three months of last year from 30 deals. At the same time, borrowing costs for developers in international markets soared to an all-time high.

The drought in issuance and rising borrowing costs highlight how the crisis at Evergrande is spreading more widely in the market and may make it prohibitively expensive for companies in the sector to raise new debt or refinance existing loans. Growing concerns about revelations from property developers have added to the angst.

“There is almost no [deals] it’s being done,” said the head of China’s debt capital markets at an international bank, adding that the biggest and most robust developers were beginning to feel the pressure of a lack of ready access to global capital markets. “All of them have some debt to come due. . . We’re definitely not out of it yet.”

The average return of a Bank of America index that tracks Chinese high-yield bonds jumped to 32.9 percent in March, up from a previous high of nearly 32 percent in 2008, at the height of the financial crisis. world.

The index is an indicator of the confidence of international investors in the health of the great real estate businessseveral of which defaulted last year as part of a liquidity crisis centered on Evergrande.

Rising yields, which are making it more expensive for developers to access the cash they need to run their highly indebted businesses, also signal a significant further deterioration in market sentiment since early February, when they were trading near 20 percent. .

Column chart of year-over-year change in issuance (%) showing the evaporation of sales of Chinese developers' high-yield bonds

Bankers and fund managers say the Evergrande default at the end of last year raised concerns about lack of disclosure as international investors struggle to assess the company’s hidden debts.

Those concerns were compounded this week after six Chinese property Groups such as Evergrande said they would miss a deadline to submit annual audited results in Hong Kong this month.

The drop in debt fundraising by Chinese real estate groups comes as international bondholders move closer to taking legal action against Evergrande. The group revealed this week that mystery lenders to its real estate services units had claimed more than $2 billion of his cashdecreasing the chances that offshore bondholders will recoup their losses.

Line chart of effective yield on Chinese corporate dollar bonds (%) showing borrowing costs for risky Chinese issuers hit record

“It all depends on confidence,” the debt capital markets banker said, adding that the second quarter would see little to no issuance if doubts about developer books persisted. “Because if I can’t trust your finances, what do I have?”

While Evergrande has borrowed heavily outside of China, the vast majority of its more than $300 billion in liabilities are in mainland China and overseas investors have been left in the dark. Its bonds due in 2025 are trading at just 13 cents on the dollar.

A Hong Kong-based fund manager said both global and Chinese investors had been selling developer bonds regardless of whether issuers faced imminent payment problems.

“They are throwing almost everything, good names, bad names, if people want to go out [of the sector] they will get rid of the good names because they have trading liquidity,” said the fund manager. “There’s a lot of cynicism now to believe anything the developers say.”

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