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Evergrande does little to avoid defaults and revive China’s real estate bond sales

Chinese real estate firms could be locked out of the offshore bond market until early next year as global investors watch the embarrassed Chinese Evergrande settle their debt problems. The fund manager and advisor said.

Evergrande offered $ 83.5 million to Citibank trustees on Thursday, paying bond coupons that initially expired on September 23, and confused market expectations by avoiding imminent defaults. The move has little effect on calming investors in the nervous real estate market, they added.

Instead, the market is likely to remain collapsed, a struggle to contain increased asset sales and high private funding by low-rated companies seeking to refinance debt and avoid defaults next year. May lead to.

“Investors need to see how tight real estate developers are, so they may have to wait for the full-year results that are likely to occur at the end of the first quarter of next year,” said Arthur Lau of PineBridge Investment. Maybe. “

Evergrande’s payments were positive, but we still have to make $ 195 million overdue coupon payments, and there are the following major deadlines to avoid the October 29th and November 10th defaults. Bonds from November 1st to December 28th.

Lau said investors are closely monitoring China’s real estate sales and added that they expect the capital markets to reopen in the first quarter at best.

“It’s difficult for (developers) to enter the market with that background, as we expect even fewer defaults by the end of the year.”

Data on Friday showed that the Chinese government’s land sales fell for two months in the rapidly chilling real estate sector.

According to JP Morgan, the real estate sector accounts for a quarter of China’s total fixed income stock and more than half of its high yield bonds. The sector also has the highest share of high yield bonds at 69%.

Approximately $ 322 billion worth of bonds in various currencies from mainland Chinese companies will expire this quarter, according to Refinitiv.

Over the next 12 months, China’s real estate sector alone will incur $ 28.3 billion worth of offshore debt. By the end of 2021, the biggest deal was Shui On Development’s $ 500 million deal in late November.

The Fantasia Holdings Group, which missed a $ 206 million bond repayment in early October, is maturing $ 420 million worth of bonds in mid-December.

Loss of investor trust

Investors are likely to be cautious about buying low-rated Chinese real estate debt until real estate sales and mortgage applications begin to grow, according to fund managers.

“Real estate companies were very active in the US dollar bond market because of the low-interest rates offered, but how international investors will look at this sector in the future,” said Hong Hao, head of research at BOCOM International. It will depend on what you are doing. “

“While some high-risk investors are still interested, the dynamics of the Chinese real estate market are changing.”

According to Refinitiv, the slowdown in debt issuance from this sector is already clear, with Chinese real estate developers issuing $ 2.7 billion worth of offshore bonds in the third quarter, the lowest quarterly since the end of 2017.

There were few signs of recovery in October.

“Currently, it will be very difficult for Chinese real estate issuers to access the bond market,” said Soo Chong Lim of JP Morgan.

She wants to see “a signal from the central government to stabilize both funding terms and the physical market before returning to the bottom of the credit curve.”

JPMorgan calculates that China’s high-yield market has a year-to-date default rate of 5.2% and the real estate sector has a high yield of 6.7%, both record highs.

Herbert Smith Freehills partner Alexander Aitken said real estate companies are facing a loss of investor confidence and are unlikely to be resolved in the short term.

“We’ve already seen bond yields rise so significantly that it can be difficult for high-yielding Chinese real estate issuers with a regular investor community,” he said.

“The interesting question is whether the current situation is limited to the real estate sector or will it begin to spread more widely in the Chinese credit market.”

(Report by Scott Murdoch in London and Karin Strohecker in London, additional report by Patturaja Murugaboopathy in Bangalore, edited by Sumeet Chatterjee, Kirsten Donovan)

 

Evergrande does little to avoid defaults and revive China’s real estate bond sales