(Bloomberg) — Tightening liquidity means that Chinese developers are seeking to extend maturities or undertake debt exchanges on bond obligations to avoid default amid the fallout from China Evergrande Group.
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Modern Land (China) Co. is asking for a three-month extension on a dollar bond due Oct. 25, saying in an exchange filing that it’s looking to “improve our liquidity and cash flow management and to avoid any potential payment default.” 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.
These latest developments come as investors are scrutinizing the real-estate sector to see which developer may next show signs of liquidity stress, following Fantasia Holdings Group Co.’s unexpected default last week and continued uncertainty at Evergrande, which has coupon payments on three more dollar notes due Monday. Chinese high-yield dollar bonds fell by as much as 5 cents on the dollar Monday morning, according to traders, adding to last week’s plunge.
Tensions in China’s dollar-bond market could soon create headaches for the country’s equity traders, according to Gilbert Wong, head of Asia quantitative research at Morgan Stanley. High-yield credit spreads over comparable Treasuries are the widest on record — at about 1,866 basis points on an option-adjusted basis, data compiled by Bloomberg as of Friday show.
But a measure of stock volatility has actually fallen so far this month. The pair has shown a close relationship in recent years, which suggests their divergence may not last.
Meanwhile, Kirkland & Ellis and Moelis & Co. are working on contingency plans with offshore holders of Evergrande’s bonds who fear the company may sell assets the investors have been counting on to back up their claims if the firm collapses. Moelis and Kirkland are advising a group that so far includes six members holding $2.5 billion of Evergrande offshore bonds, a Moelis managing director said on a call with bondholders Friday.
Key Developments:
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Evergrande’s Audacious Founder Hunts for a Way Out of Crisis
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Credit Anxiety Is Coming for Your Stocks: What to Watch in China
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Evergrande Creditors Brace for Battle on Offshore Assets
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The Looming Bond Payments for China’s Most Distressed Firms
Morgan Stanley Upgrades China Property on Likely Policy Easing (12:10 p.m. HK)
Morgan Stanley has upgraded its view on China’s property sector to “attractive” from “in-line” as it sees growing likelihood of easing measures, with default risks and housing market weakness largely priced in. “We believe an inflection point for China’s property policy is approaching,” analysts led by Elly Chen wrote in a note dated Sunday. “Property stocks will react on policy easing, which looks more likely now.”
China Property Needs Policy Adjustment to Restore Confidence: Goldman Sachs (11:47 a.m. HK)
The sector needs some kind of policy change in order to restore confidence, Kenneth Ho, Goldman Sachs’ head of Asia credit strategy said during an interview with Bloomberg TV on Monday. Ho says the sector could see more defaults amid the government’s deleveraging efforts, and “the market is pricing in a wider tail risk, which we don’t think is unfair.”
Chinese High-Yield Dollar Bonds Drop as Much as 5 Cents: Traders (10:26 a.m. HK)
Among the declines, Aoyuan’s 6.35% note due 2024 dropped 12.7 cents on the dollar to 58 cents, according to Bloomberg-compiled prices as of 12:12 p.m. Sunac’s 6.5% dollar bond due 2026 fell 7.1 cents to 60.1 cents, with both notes heading for their lowest-ever closing levels.
Yields on Chinese junk-rated dollar bonds surged 291 basis points to 17.54% last week, the highest level in about a decade, according to a Bloomberg index.
Fantasia Group China Cut to A From AA+ at China Chengxin (10:03 a.m. HK)
China Chengxin International downgraded Fantasia Group China and put it on watch list for possible downgrade, according to a statement on Cninfo website. It added that parent Fantasia Holdings’ unpaid dollar bonds have significant negative impact on Fantasia Group China’s credit quality, Chengxin says.
Goldman Says Property Makes Up Almost a Quarter of China’s GDP (9:22 a.m. HK)
China’s property sector accounts for as much as 23.3% of the country’s gross domestic product if all business activities related to the industry are included, Goldman Sachs Group Inc. says in a report Monday.
A wide range of estimates for the scale of China’s property sector — up to about 30% of GDP — have been reported by media and other analysts. The variation is mainly due to different definitions of the scope of the industry, according to the report.
Modern Land Seeks to Extend Bond Maturity (8:15 a.m. HK)
Modern Land is seeking consent to extend the maturity of its 12.85% senior notes due 2021 by three months, according to the statement. It’s also asking for consent to redeem 35% of the bond’s principal on Oct. 25. The company said in a separate filing that Chairman Zhang Lei and President Zhang Peng intend to loan it about 800 million yuan ($124 million), a move expected to be completed in two to three months.
Evergrande’s Reach Goes Way Past Just Building Homes (6:06 a.m. HK)
Evergrande is the biggest financial worry in China right now, and it’s fast becoming a problem outside of the nation’s borders. In a nutshell, the giant real-estate developer is $300 billion in debt and is widely expected to default on bond payments. The group owns 1,300 projects in more than 280 cities. But its reach goes way beyond building homes. Its billionaire owner Hui Ka Yan has his fingers in pies from electric vehicles and media production to mineral water and soccer.
Fantasia’s Default May Suggest Potential Issue Regarding Payment (6 a.m. HK)
The default on principal payments by Fantasia in the October bond maturity may indicate a potential issue to pay, given the company’s record of buybacks since May 2021, according to a report by Bloomberg Intelligence. This goes directly against the Chinese government directive on issuer conduct, risking severe consequences, the report said.
The act could risk destabilizing the high-yield market further as fundamentals may no longer dictate default risks but may be offset by increasing bond buybacks from more reputable firms.
Evergrande dollar bond interest deadlines:
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