Some yield-hungry bond investors are continuing to look for opportunities in the China property sector, discounting rising default cases in the hopes that Beijing will push ahead with its policy easing efforts.
Last week, spreads on Chinese high yield-rated dollar bonds tightened by 170bp, even though China Evergrande Group and Kaisa Holdings dominated headlines due to their respective dollar bond defaults. More broadly, Asian investment grade spreads tightened by 8bp to 125bp, while those for high yield tightened 76bp to 1,127bp, Bank of China research analysts wrote in a note on Monday.
The rally in the bonds was concentrated on the double-B rated sector, said Goldman Sachs analysts in a note last Friday. Goldman Sachs' analysts had been expecting policy support, but believe Beijing’s easing measures will disproportionately benefit stronger credits.
Market confidence was boosted last week after a 50bp reserve requirement ratio cut by China’s central bank.
Sentiment towards the sector is also improving as developers find new avenues to raise money. For instance, a few developers are turning to the onshore interbank bond market, with some planning supply chain-backed structured notes. Offshore, Greenland Group became the first major developer to sell dollar bonds in two months last week, while others, such as Shimao Property Holdings and Logan Property Holdings Company, have turned to the equity market to shore up capital.
Some extra impetus came from other regulators, too. Last Friday, the National Association of Financial Market Institutional Investors (Nafmii) — an interbank regulator that overseas corporate bond issuance — met with a handful of developers. It promised support to the firms and prioritized those aligned with government real estate policies, according to a report in state-owned newspaper Securities Times.
Yet, caution is key for some. The Goldman Sachs' analysts surveyed some real money and hedge fund credit investors in Hong Kong and Singapore over the past two weeks.
The result? Some of these investors remain largely defensive on the China property high yield market. While most of the investors found valuations to be attractive for China property, the continued market volatility and high maturities coming up in January were holding them back from going down the credit curve.
Overall, over $17bn of China high yield property bonds are maturing until the end of April 2022, according to Goldman Sachs. This includes $5.5bn due in January, $4.9bn in March and $5bn in April.
Despite a volatile 2021, the investors surveyed foresee stable to positive fund flows in Asia credit.
“A number of investors questioned whether higher US rates will lead to fund outflows, and we think that is unlikely given that the path of tapering and Fed funds hikes in second half of 2022 are already well expected,” the Goldman Sachs note says.
Rising idiosyncrasies
As investors swing between caution and hope, the Asia high yield corporate default rates are headed towards a record year in 2021, mostly led by China property. Year-to-date, the Asia high yield corporate default rate is 17.1%, while for China high yield property it stands at 27.6%, according to the US bank.
Hong Kong-listed Golden Wheel Tiandi Holdings Company is one of the latest firms to have added to the stress.
Last Friday, the property firm said it won’t make coupon payments on its outstanding $145m 16% 2023 notes to preserve liquidity. The coupon on these notes was due on December 11 but because it was a weekend, the payment was to be made by Monday. The notes have a 30-day grace period. Golden Wheel ruled out any cross-default on its other dollar bonds due to the non-payment.
Earlier this month, the company appointed Guotai Junan Securities (Hong Kong) and Alvarez & Marsal Corporate Finance as financial advisers, as well as Linklaters as legal adviser, to kick start discussions with bondholders to address its debt.
Another Hong Kong-listed developer Powerlong Real Estate Holdings said it has raised $150m from a tap of its 6.25% 2024 notes. Powerlong will get net proceeds of $134.1m from the bonds, which were sold at 87.238, or a yield of 12%.
Powerlong’s 2024s were trading at 95 cents, or at a yield of around 8.5%, before the tap, Lucror Analytics analysts said in a note on Monday. In August 2020, Powerlong first raised $200m, and followed up with a tap of $150m in September the same year.
Despite the surge in funding cost, Lucror viewed the funding access positively. Powerlong said it will use the funds to repay debt due within a year. Guotai Junan International was the sole lead manager and bookrunner of the tap.
Powerlong has a HK$1bn bond due in January. Its next dollar maturity is in April, when a $200m principal payment is due. In September, Powerlong redeemed $200m of notes. In July, the company issued $200m 364-day notes at 4%, following a similar deal in April. In July, it borrowed $200m from a syndicated loan.