Evergrande crisis shuts Chinese developers out of global debt market

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Issuance of dollar-denominated debt securities by Chinese property developers has come to a virtual standstill as the escalating Evergrande crisis cuts off other property companies’ access to global capital markets.

Issuance of high-yield dollar bonds by Chinese developers in the year to date was down a record 97% from the first quarter of 2021, according to Financial Times calculations based on Refinitiv data. .

So far, only two deals with a total value of less than $295 million have closed, compared to more than $8.7 billion in the first three months of last year raised from 30 deals. At the same time, borrowing costs for developers in international markets have reached an all-time high.

The emissions drought and soaring borrowing costs show how the crisis in Evergrande is bleeding more broadly into the market and may make it prohibitively expensive for companies in the sector to take on new debt or refinance existing borrowings. Growing concerns over disclosures from property developers added to the angst.

“There is practically no [deals] underway,” said the head of Chinese debt capital markets at an international bank, who added that even bigger and more robust developers were beginning to feel the pressure of a lack of easy access to global capital markets. “All of them have maturing debts . . . we are certainly not out of it yet.

The average yield on a Bank of America index listing China’s high-yield bonds jumped to 32.9% in March, up from the previous high of nearly 32% in 2008, at the height of the global financial crisis.

The index is a gauge of international investors’ confidence in the health of China’s vast property companies, several of which defaulted last year amid a liquidity crisis centered on Evergrande.

Rising yields, which make it more costly for developers to access the cash they need to run their highly indebted businesses, also signal a further significant deterioration in market sentiment from early February, when they were trading almost 20%.

Bankers and fund managers say Evergrande’s default late last year raised concerns about a lack of disclosure as international investors struggle to assess the company’s hidden debts.

Those concerns were heightened this week after six Chinese property groups, including Evergrande, said they would miss a deadline to file audited annual results in Hong Kong this month.

The drop in debt fundraising by Chinese property groups comes as international bondholders move closer to legal action against Evergrande. The group revealed this week that mystery lenders in its property services units had claimed more than $2 billion of its cash, diminishing the chances of offshore bondholders recouping their losses.

Line chart of effective yield on Chinese corporate dollar bonds (%) showing borrowing costs for risky Chinese issuers at all-time high

“It’s up to confidence,” the debt capital markets banker said, adding that the second quarter would see little to no issuance if doubts about developers’ books persisted. “Because if I can’t trust your finances, what do I have?”

While Evergrande has borrowed heavily outside of China, the vast majority of its more than $300 billion in debt is on the Chinese mainland and foreign investors have been largely left in the dark. Its bonds maturing in 2025 are trading at just 13 cents on the dollar.

A Hong Kong-based fund manager said global and Chinese investors sold sponsor bonds whether or not issuers faced imminent redemption issues.

“They throw almost everything, good names, bad names – if people want to get out [of the sector] they will dump good names because they have trading cash,” the fund manager said. “There’s a lot of cynicism now in believing everything developers say.”

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