Chinese Developer Bond Rout Deepens on Hidden Debt Concerns

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1 / 3Chinese Developer Bond Rout Deepens on Hidden Debt Concerns

(Bloomberg) — Fresh turmoil rocked Chinese property bonds on Monday as investors fretted over the true scale of the industry’s hidden debts.

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    A Logan Group Co. note due 2023 sank 11.5 cents to a record low 65.5 cents after Debtwire reported the developer could be on the hook for $812 million of guarantees on outstanding obligations due through 2023. The firm, whose bonds traded at close to par as recently as last month, denied both the report and market speculation the company has privately sold debt.

    Global Tech News Daily

    Mounting concerns about the transparency of China’s better developers is forcing bondholders to question the liquidity of firms whose finances appear sound. More debt would mean more creditors, some of whom could demand early repayment. There’s also the risk that hidden liabilities like trust loans, private bonds or high-yield consumer products receive preferential treatment over money owed to offshore creditors. China Evergrande Group, Kaisa Group Holdings Ltd. and Shimao Group Holdings Ltd. have all faced such obligations.

    Already fragile investor confidence has taken a battering this year, effectively keeping the dollar bond market shut for developers. That’s left the sector with limited refinancing options, increasing the risk of companies failing to pay debt on time. Even China’s largest developer by sales — Country Garden Holdings Co. — last week struggled to tap the market for fresh funds, reportedly pulling a $300 million convertible bond issue due to weak demand. Sunac China Holdings Ltd.’s shares sank a record 23% after it sold new equity.

    Global Tech News Daily

    “Risks across the Chinese property sector are rising, evident from difficult refinancing conditions for even the most well-regarded firms,” said Wei Liang Chang, a macro strategist at DBS Bank Ltd. Greater clarity on the disclosure of liabilities as well as asset sales are crucial to shore up confidence, he added.

    Real estate financing received by developers plunged about 19% in December from a year earlier, the sharpest decline in more than seven years, according to Bloomberg calculations based on full-year government figures released Monday. Home sales by value declined 19.6% in December from a year earlier, a sixth consecutive monthly drop, while property investment shrank 14%.

    At least seven developers have defaulted on dollar bonds since October. That includes Evergrande, whose crisis has ensnared lender China Minsheng Banking Corp., the world’s worst-performing bank stock. Guangzhou R&F Properties Co. was downgraded to restricted default by Fitch Ratings last week due to what the ratings firm called a distressed debt exchange.

    Chinese property firms need to repay or refinance some $99 billion of local and offshore bonds this year. Just under half of that is outstanding dollar debt, Bloomberg-compiled data show.

    An index of property shares slumped 1.6% on Monday as an interest-rate cut by China’s central bank did little to assuage investors. Country Garden tumbled more than 9% to an almost five-year low. Logan shares slid 5.1%. The company is rated the equivalent of a BB rating at all three major credit risk assessors.

    The gauge fell 34% last year, its worst since the global financial crisis in 2008.

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