Festering Evergrande contagion worries push China spreads to record

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Festering Evergrande contagion worries push China spreads to record

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(Reuters)-13/10/2021

Concerns over the potential spiraling effects of the debt crisis on developer China Evergrande Group pushed 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 defaulted on its third round of interest payments on its dollar bonds in three weeks, while other firms warned of defaults.

In a clear indication of global investors’ concerns about the yet spreading debt transition, options-adjusted spreads on the ICE BofA Asian Dollar High Yield Corporate China Issues Index rose to a new all-time high of 2,337 basis points on Tuesday evening US time. up from the previous top of 2,069 basis points on Friday.

Investment grade spreads also hit their highest level in more than two months.

Kim Ing Tan, a credit analyst at S&P Ratings, said in a report, “We see a risk that a disorganized correction in the property market could lead to a sharp drop in prices, impacting the personal wealth of homeowners. “

“Such an event could contribute to the massive loss suffered by contractors and service firms supporting investors and developers in wealth management products.”

Evergrande did not pay nearly $150 million worth of coupons on three bonds due on Monday after two other missed payments in September.

While the company hasn’t technically defaulted on payments that have a 30-day grace period, investors say they’re expecting a lengthy and drawn-out debt restructuring process.

Bonds from Chinese property companies continued to fall on Wednesday, with seven of the top 10 losers in Shanghai-traded corporate bonds.

Bonds issued by developers including Shanghai Shimao Co Ltd China Aoyuan Group and Country Garden Properties Group fell between 1.6% and 7.4%, according to exchange data.

Dollar bonds also fell, although traders said that limited market liquidity following earlier routes meant prices were only indicative, with tradable prices possibly 10–20 points lower than screen prices.

MarketAccess quoted the Cassa Group Holdings June 2026 bond as falling 0.9% at 41.125 cents. Its yield has increased by about 40%.

In equity markets, a sub-index tracking A-shares of property firms fell 0.7% against a 1.2% rise in the blue-chip CSI300 index.

Markets in Hong Kong remained closed on Wednesday due to a storm that affected the city.

debt wall

Evergrande’s main unit, Hengda Real Estate Group Co., faced a 121.8 million yuan onshore bond coupon payment on October 19, and Evergrande has another $14.25 million in bond coupons on October 30.

Debt pressure extends far beyond Evergrande. Chinese property developers have $555.88 million worth of high-yield dollar bond coupons this month, and nearly $1.6 billion before the end of the year, and Refinitiv data at least $92.3 billion worth of assets. Shows developers’ bonds maturing next year

Evergrande’s mid-sized rival Fantasia has also already missed payments and Modern Land and Cynic Holdings are trying to delay the payment deadline, which is still likely to be classified as a default by the main rating agencies. Is.

“These stories challenge the notion that Evergrande is one-of-a-kind,” analysts at Capital Economics wrote in a note.

He added that although China’s policymakers would be able to avoid a “doomsday scenario”, the excessive asset sector would continue to weigh on the world’s second-largest economy, he said.

“Even after systematic restructuring of the worst-affected developers with minimal transition to the financial system, construction activity will still almost inevitably slow down greatly.”

The IMF said on Tuesday that China has the ability to resolve Evergrande’s debt-related issues, but warned that an escalation of the situation could lead to widespread financial stress.

The $5 trillion Chinese wealth sector, by some metrics accounts for nearly a quarter of the Chinese economy and is often a major factor in Beijing policymaking.

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