Chinese builders are scrambling for ways to avoid bond defaults after liquidity conditions tighten for real estate

Chinese builders are looking to payment extensions or debt exchanges to avoid default on imminent bond obligations as liquidity conditions tighten for the real estate sector. 

Modern Land (China) Co. is asking holders for a three-month extension on $250 million dollar bond due to mature Oct. 25 while also announcing two top executives plan to loan the builder about $125 million. Xinyuan Real Estate Co. has proposed paying just 5% of principal on a note due Oct. 15 and swapping that debt for bonds due 2023. Fitch Ratings called the move a distressed debt exchange while downgrading the firm to C.

Beijing’s clampdown on the real estate sector and uncertainty over the future of giant China Evergrande Group has prompted rising default risks for the broader industry as weaker-rated developers struggle to meet upcoming obligations. 

There’s growing alarm that Evergrande’s liquidity crisis is spilling over to other developers as the nation’s dollar junk bond yields have soared to their highest in about a decade. The notes, which are dominated by real estate borrowers’ debt, fell another 5 cents on the dollar, credit traders said Monday morning. 

Rising borrowing costs for China’s riskier borrowers is prompting increased refinancing risks as firms may struggle to access the offshore bond market. That could trigger a wave of defaults across the real estate sector. Property firms’ missed payments made up 36% of the record 175 billion yuan ($27.2 billion) in onshore corporate bond defaults this year, Bloomberg-compiled data show.

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Still, for borrowers that can afford it, the selloff may also provide an opportunity to buy back bonds at deep discount and help shore up balance sheets. Yuzhou Group Holdings Co.’s chairman recently bought $5.6 million of the company’s dollar notes through his associates, according to a filing last week. 

Developers with bonds trading at distressed levels have these notes coming due this week: 

  • Agile Group Holdings Ltd. 1.8 billion yuan note, Oct. 11
  • Aoyuan Corp. Group Ltd. 1.5 billion yuan bond, Oct. 12 (Said it has deposited funds for payment)
  • Xinyuan Real Estate Co. note with $229 million outstanding, Oct. 15
  • Fujian Sunshine Group Co. 375 million yuan bond, Oct. 16
  • Guangzhou Times Holding Group Co. 1.7 billion yuan note, Oct. 17
  • In the meantime, investors are still waiting for clarity from Evergrande over a potential restructuring or solution for its liquidity crisis which some analysts say could drag on for months. Some of the firm’s bondholders fear Evergrande may sell assets that they’re counting on to back up their claims if the company collapses. It has $148 million due Monday involving three dollar-bond coupons, Bloomberg-compiled data show, after having given no signs it made interest payments expected in September. 

    More defaults from Chinese property firms are expected under Beijing’s deleveraging campaign, said Kenneth Ho, Goldman Sachs Group Inc.’s head of Asia credit strategy. The sector “needs some kind of policy change in order to restore confidence.”

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