Collapse In Shimao Bonds Could Be "More Devastating Than Debt Crises At Evergrande And Kaisa"

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by Tyler Durden
Monday, Dec 13, 2021 - 08:45 PM

Despite trading solidly higher out of the gate amid a boost in risk sentiment thanks to predictions that China will start adding fiscal stimulus in early 2022, Asian stocks limped into the red after a wave of selling swept through Chinese developers' bonds and shares after the sudden plunge in a major property firm’s notes renewed concern over the health of the sector.

With the world eager to move on from the Evergrande drama, Bloomberg reports that Shimao Group Holdings dollar notes dropped as much as 12 cents on the dollar, with the selloff spreading to other company bonds including Sunac China Holdings and KWG Group Holdings. The selloff was so steep, trading was halted in six of Shimao’s yuan bonds after they plunged, with one falling more than 50%.

A Bloomberg Intelligence stock index of real estate firms slumped 2.8%, led by an 12% drop by Shimao. Property stocks were among the biggest losers in Hong Kong. Sunac plunged more than 7%, while its dollar bonds fell as much as 5 cents on the dollar, according to credit traders. Agile Group Holdings Ltd. shares slid 6.4%. KWG’s dollar bond due 2023 declined 2.8 cents to 82 cents.

While nowhere near as big as Evergrande, Shimao is China’s 13th biggest developer by contracted sales and among the largest property debt issuers with about $10.1 billion in outstanding local and offshore bonds. The company has a junk Ba1 long-term rating from Moody’s Investors Service and is on review for a further downgrade. Shimao lost its investment-grade rating at S&P Global Ratings last month, but has an investment-grade rank of BBB- at Fitch Ratings.

A bond issued by one of Shimao’s local units suffered the largest haircut in China’s exchange-traded repo market last week. Borrowers putting up a Shanghai Shimao Jianshe note due 2025 for collateral get just 35% of the note’s face value as cash, down from 50% the prior week. Shimao’s dollar bond due 2022 fell 12.4 cents on the dollar to 75.7 cents, set for its lowest price in about month.

"A major price collapse or a downfall of Shimao will cause lapse in confidence in cross-over investment grade names in China property, which acts as the final refuge for the sector," according to Anthony Leung, head of fixed income at Metropoly Capital HK. The impact could be more devastating than debt crises at Evergrande or Kaisa because they were of much lower credit quality, he added.

Since there wasn't any firm news behind the swoon, the company said it’s looking into market rumors which it blamed for causing the selloff.

As Bloomberg notes, the plunge shattered the buoyant mood that dominated trading last week, when Beijing’s shift toward pro-growth policies helped drive yields on Chinese junk dollar bonds down the most in seven years. Optimism over further easing steps had helped counter the long-anticipated defaults by China Evergrande and Kaisa Group.

The latest selloff - which wiped out a gain of 1.9% in the Hang Seng China Enterprises Index - underscores the nervous fragility of investor sentiment toward China’s troubled real estate sector, and the nation’s assets in general, as Xi pushes ahead with plans to reduce risk in the financial system.

One reason for the concern was the inclusion of the phrase “housing is for living in, not for speculation” by the Communist Party’s top decision makers at the end of an annual economic conference added to concern. The phrase - which President Xi Jinping has stressed many times - hadn’t been used in Politburo’s preparatory meeting last week. The addition clarifies “overly optimistic views” about outright easing of property policies, said Bruce Pang, head of macro-economy and strategy research at China Renaissance Securities Hong Kong Ltd. “I don’t think China will completely relax property policies,” he said.

Going back to Shimao, on Nov 10, S&P said that the company's previously forecast sales will be weaker due to “tough” business conditions, while the company may struggle to deleverage in the next 12 months.

Bottom line, despite recent long overdue overtures to ease financial conditions, China’s property developers remain under pressure from slowing sales and a wall of bond maturities coming due in January, according to Citigroup analysts. That means credit stress has yet to reach a maximum and weaker firms are likely to default.