China Developer Bonds on Cusp of Distress After Wanda Surprise
Published 18 July 2023, 04:25:42.85 GMT
(Bloomberg) -- A gauge of Chinese high-yield dollar debt fell to the cusp of distress after one of the most closely watched property firms warned it was short of funds to repay a bond due in days, renewing concerns about the health of developers struggling with weak sales and limited refinancing access.
A key unit of Dalian Wanda Group Co. — among the few Chinese real estate conglomerates to stay afloat even as peers succumbed to an industrywide debt crisis in recent years — told some creditors Monday it faces a funding gap of at least $200 million for repayment of a $400 million note that matures July 23. There’s no grace period for the unit, Dalian Wanda Commercial Management Group Co., to pay the principal.
The bond retreated 5.6 cents Tuesday to 65.9 cents, after plunging a record 21.8 cents Monday. The slide has spilled over to the broader market for Chinese junk dollar notes, most of which are from builders. The average price of the securities dropped 0.6 cent Monday in their worst day since July 5 and hovered Tuesday around 70 cents —generally considered a threshold for distress. Shares of developers slumped, with a Bloomberg Intelligence gauge on the sector falling more than 2%.
China’s developers are struggling with an unprecedented property debt crisis that has intensified since the default of giant China Evergrande Group in 2021. The volatility in recent days underscores the broader challenges facing the sector, which often rallies briefly on supportive policy steps but then falls back when more repayment woes emerge, fueling investor concerns amid record defaults.
“To be able to have a bond coming up and not having the cash on hand tells you there is still inherent tightness in the sector,” Wilfred Wee, portfolio manager at Ninety One Singapore Pte, said in an interview with Bloomberg TV. “Wanda, being one of the bigger names, you would expect them to have the resources.”
The declines in shares Tuesday followed renewed concerns over the industry’s profitability after Evergrande reported combined losses of more than $81 billion over two years. Times China Holdings Ltd. and Sino-Ocean were among the biggest decliners.
Another pain point in recent months has been state-backed developer Sino-Ocean Group Holding Ltd., which had long avoided repayment issues that hit some fellow government-linked peers but that has been increasingly embroiled in distress. The builder suspended trading of its 4% yuan bonds Tuesday, citing “significant uncertainty” in repayment, according to a company filing on Shanghai Stock Exchange. Its shares slumped as much as 11.4% at one point Tuesday morning in Hong Kong.
So far, policy measures this year including easing of mortgage rates on first home purchases and a recent revival in the pipeline for state-guaranteed bond sales for private developers have failed to spark any sustained recovery.
That pattern was on full display this week. A Bloomberg index tracking China high-yield dollar bonds’ performance returned 1.86% last week, one of its best weekly returns this year, before the declines Monday ate into that. The average price of the notes had advanced to 70.5 cents Friday before falling back more toward distressed levels Monday.
One of the few survivors in China’s offshore high-yield market, Wanda has so far avoided defaulting on public dollar debt. The developer has not indicated that it would not be able to come up with the funds to meet the dollar bond deadline. And it told the creditors that it’s still raising funds, as well as weighing an alternative, unspecified plan, according to people involved in the private conversations who asked not to be identified.
If Wanda were to fail to repay the July bond, it would “be another nail in the coffin for Chinese high-yield property bonds,” said Charles Macgregor, head of Asia at Lucror Analytics. He said very few investors are willing to increase holdings, exemplified by some of Country Garden Holdings Co.’s bonds that are traded in the 20s and 30s now.
Investors are closely monitoring the developments given Wanda is seen as a bulwark against even more contagion in the real estate debt market.
Developments so far haven’t been encouraging. The long-term issuer credit rating of the commercial property operator unit, Dalian Wanda Commercial, was lowered by S&P Ratings to B+ from BB due to weaker liquidity and uncertainties over the listing of a subsidiary, the rating firm said in a statement late Monday. S&P kept Wanda on its negative rating watch, saying details including “negotiations with pre-IPO investors, maintaining financing channels, as well as alternative asset disposals to ease the liquidity strain” will help it resolve the negative watch.
China’s worsening property debt crisis, including mounting stress among local government financing vehicles, is complicating policy maker’s efforts to avert a worse economic cooling. Data released Monday showed China’s economy lost momentum in the second quarter, adding to global risks as Beijing hints that any stimulus measures will be targeted rather than broad. Property-investment declines steepened in June, underlining the sector’s worsening downturn as policymakers pledge more support.
By Wei Zhou
--With assistance from Dorothy Ma and John Cheng