China Builder’s Record Junk Bond Sale Bites Buyers Amid Turmoil

Some investors are left nursing losses after China’s most indebted property developer pulled off the biggest- ever dollar-denominated junk bond sale by a company from the nation.

China Evergrande Group sold $6.6 billion of notes, with $3.8 billion of that counting toward new debt and the rest being used to exchange with existing securities. The bonds dropped as much as five cents on the dollar -- a stunning move in a market where newly issued securities typically rise on the first day of trading.

The sale came just as markets were rocked by reports of a regulatory crackdown on some of the country’s biggest borrowers.

The China Banking Regulatory Commission asked some banks to provide information on overseas loans made to companies including Dalian Wanda Group Co. and Anbang Insurance Group Co., according to people familiar with the matter. Applications for new offshore bond deals by real estate firms hadn’t received approvals from the National Development and Reform Commission since April, seven bankers said last month.

Evergrande appears "to be trying to get as much money as they can,” said Charles Macgregor, head of emerging markets at Lucror Analytics in Singapore. “We expect that other high-yield borrowers could also be desperate for funds given the NDRC’s crackdown on U.S dollar issuance. Investors are facing indigestion after Evergrande’s jumbo sale and this could mean poor performance for following deals.”

Record Offering

Two calls to Evergrande’s investor relations’ department went unanswered.

Evergrande, which is rated five levels below investment grade at S&P Global Ratings and Moody’s Investors Service, exchanged about $2.8 billion of existing notes for new securities.

In the end, the $6.6 billion issuance was the biggest dollar bond sale by any Chinese company since Alibaba Group Holding Ltd. raised $8 billion in its debut offering in 2014, which had a higher, investment-grade rating.

Evergrande surprised markets yet again with the size of its debt appetite, Charles Chang, head of Asia credit strategy and trading desk, said in a note.

While the size was surprising, Evergrande is still in an aggressive mode as it expands and its total debt level wasn’t expected to decline, according to Matthew Chow, an analyst at S&P.

Price Drop

“Evergrande has a very big debt book these days, and the new money component of the issuance ($3.8 billion), though big, only represents 4-5 percent of the company’s existing total adjusted debt," Chow said. “We expect total debt to increase by double digits this year, and the new issuance will be part of this increase. We will continue to monitor the situation."

Evergrande’s new bonds due in 2025, the longest-dated tranche in the three-part offering, were last at 96.4 cents on the dollar, down from issuance at 100 cents. Debt from other Chinese developers including Wanda and Kaisa Group Holdings Ltd also fell at the end of the week.

“I think those moves were mostly related to yesterday’s CBRC headlines," said Mark Reade, a fixed income analyst at Mizuho Securities Asia Ltd. in Hong Kong. “Definitely a sign of investor nervousness against the backdrop of very tight spreads, but so far we’ve seen minimal fallout on the broader market."

Bloomberg News
June 23, 2017, 05:30:22 GMT

Reporting by Sridhar Natarajan, Sally Bakewell and Nabila Ahmed; With assistance from Claire Boston, Denise Wee, Lianting Tu and Neha D'silva; Editing by Andrew Monahan and Neha D'silva