After weeks of being halted for trading since the last day of September, on Thursday trading in shares of China's most insolvent property developer, Evergrande, resumed. In retrospect, it was not a great idea.
Evergrande shares slumped as much as 14.2% after the debt-strapped developer sought unsuccessfully to sell a controlling stake in its property management business. The collapse of talks to sell the 50.1% stake in Evergrande Property Services to Hopson Development Holdings for 20.04 billion Hong Kong dollars ($2.58 billion), revealed in an exchange filing late Wednesday evening, ratcheted up the odds that Evergrande will default on an offshore bond this weekend when the 30 day grace period expires on an offshore bond coupon payment that was due a month ago and was never paid.
Evergrande also indicated that it had not made progress on other asset sales either.
"There has been no material progress on sale of assets of the group," Evergrande said. "In view of the difficulties, challenges and uncertainties in improving its liquidity, there is no guarantee that the group will be able to meet its financial obligations."
Shares of the world's most indebted developer fell as low as HK$2.53 on Thursday from their previous close of HK$2.95. They ended the day at HK$2.58.
Separately, Evergrande Property Services fell as much as 10.2% before closing down 8% while Hopson gained 7.6%.
Since late September, Evergrande has failed to pay bond coupons worth $277 million. Its shares and bonds have lost four-fifths of their value this year. Evergrande's turmoil has roiled global markets as investors scramble to gauge the fallout from a possible collapse of the company and fret over the broader health of the leveraged Chinese property market.
As Nikkei notes, the company is fast running out of cash and had hoped to get past the latest crisis by selling assets, attracting investors and boosting sales. It is failing on all three counts and has missed payments to banks, retail creditors, contractors, bondholders and suppliers, which has led to the suspension of more than half of its 800 ongoing development projects.
Making matters worse, the company's operations are effectively frozen, with real estate sales plunged about 97% during peak home-buying season. Contracted sales, the key source of liquidity, plunged to 3.65 billion yuan ($571 million) in the Sept. 1 - Oct. 20 period, the company said on Wednesday. That compared with over 142 billion yuan in sales in the same period last year.
Chinese authorities have refused to bail out the developer, proclaiming instead that spillover risks can be contained.
In hopes of easing growing local concerns about a "Lehman Moment", Vice Premier Liu He told a Beijing forum on Wednesday that Evergrande risks are controllable and that reasonable capital demands from property companies are being met, Bloomberg reported. Last week, People's Bank of China Gov. Yi Gang said virtually the same thing.
Still, Evergrande's woes, and missed payments by smaller rivals, have sparked fears of contagion across the $50 trillion Chinese financial system in recent weeks, where bond yields recent approached all-time highs.
Last month, S&P estimated that developers it rates are due to redeem 480 billion yuan in domestic and offshore bonds over the next year, equal to almost a fourth of their free cash reserves. The first big slug of maturities is set to come in January, with some $6.2 billion in offshore bonds due for repayment, according to brokerage CGS-CIMB.
Companies with the worst balance sheets have gotten crushed by the spike in borrowing costs, a phenomenon that’s intensifying this month as bills come due. At least three Chinese developers have defaulted in October, one may struggle to pay interest due Friday and another failed to get a three-month extension for a note maturing Monday.
As Bloomberg notes, China’s real estate sector makes up almost half of the world’s distressed dollar-denominated debt, with speculative-grade yields topping 20% earlier this month -- the highest in a decade. As authorities in Beijing seek to defuse moral hazard and deleverage the economy, some companies are being allowed to fail as long as there’s no messy spillover into the broader financial system.
The Chinese developer sector is the source of 36% of the record 175 billion yuan ($27.1 billion) in corporate local bond defaults so far this year, according to data compiled by Bloomberg. Yields on Chinese borrowers’ junk-rated dollar bonds are near 17%, the highest in about a decade. A number of the notes are trading at levels which suggest substantial risk of nonpayment.
Smaller developers such as Sinic Holdings and Fantasia Holdings Group have already defaulted, while others are struggling to repay.
On Wednesday evening, Modern Land said that it would abandon a proposal to extend repayment on a $250 million bond by three months despite continuing liquidity challenges, then Thursday morning put a halt to trading of its stock pending another announcement. It said it is seeking financial advice.
Another domino could fall Friday, when Kaisa Group Holdings is due to pay $35.9 million of interest on a dollar note. Investors are pricing in a high likelihood of default, with the note trading at less than 40% of face value after the company canceled meetings with some investors that had been scheduled to take place this week. Moody’s Investors Service has downgraded the firm to B2 from B1.
But for troubled companies, the biggest refinancing test isn’t even this month. Fifteen of China’s most stressed property firms will have $5.2 billion due in January, according to Citigroup Inc. calculations as of Oct. 1. That’s more than double the amount due in October.
“To say that China HY (high yield) -- especially the China HY property sector -- is having a tough year would be an understatement,” wrote Kelvin Pang, Morgan Stanley’s credit strategist, in a Oct. 18 note. “2021 is shaping up to be a huge test for the asset class.”
So to help investors as they navigate the mine field that is China's junk bond market, here is a maturity calendar for dollar and yuan notes from developers whose debt offers the weakest year-to-date returns in a Bloomberg index of China high-yield dollar bonds. Excluded are defaulted firms and Evergrande; the information is from data compiled by Bloomberg.
- Yango Group Co. bond with 941 million yuan outstanding, Oct. 22
- Modern Land China Co. note with $250 million outstanding, Oct. 25
- Redsun Properties Group Ltd. bond with $97 million outstanding, Oct. 30
- Central China Real Estate Ltd. $400 million note, Nov. 8
- Zhenro Properties Group Ltd. $200 million bond, Nov. 18
- Agile Group Holdings Ltd. $200 million note, Nov. 18
- Yango Group Co. bond with 603 million yuan outstanding, Nov. 19
- Zhongliang Holdings Group Co. $200 million note, Nov. 22
- Rongxin Fujian Investment Group Co. 2 billion yuan note, Nov. 28
- Ronshine China Holdings Ltd. $150 million bond, Dec. 3
- Kaisa Group Holdings Ltd. $400 million note, Dec. 7
- Guangzhou Hejing Holding Group Co. bond with 2.26 billion yuan outstanding, Dec. 17
- Jinke Properties Group Co. 800 million yuan note, Dec. 25
- Guangxi Construction Engineering Group Co. 800 million yuan bond, Dec. 28
- Xinyuan China Real Estate Ltd. 600 million yuan note, Jan. 4
- KWG Group Holdings Ltd. $250 million bond, Jan. 11
- Yango Justice International Ltd. $200 million note, Jan. 11
- ZhenAn Glory Investment Ltd. $100 million bond, Jan. 13
- Easy Tactic Ltd. $725 million note, Jan. 13
- Fujian Sunshine Group Co. 400 million yuan bond, Jan. 15
- China Aoyuan Group Ltd. $188 million note, Jan. 20
- China Aoyuan Group Ltd. $500 million bond, Jan. 23
- Guangzhou Times Holding Group Co. 1.1 billion yuan note, Jan. 25
- Zhongliang Holdings Group Co. $250 million bond, Jan. 31
- Ronshine China Holdings Ltd. $200 million note, Feb. 1
- Jinke Properties Group Co. bond with 350 million yuan outstanding, Feb. 9
- China South City Holdings Ltd. note with $348 million outstanding, Feb. 12
- Yango Cayman Investment Ltd. $110 million bond, Feb. 20
- Modern Land China Co. $200 million note, Feb. 26
- Ronshine China Holdings Ltd. bond with $488 million outstanding, Mar. 1
- ZhenAn Glory Investment Ltd. $50 million note, Mar. 6
- Agile Group Holdings Ltd. $500 million bond, Mar. 7
- Greenland Global Investment Ltd. $350 million note, Mar. 12
- Yango Justice International Ltd. $300 million bond, Mar. 18
- Yango Group Co. 500 million yuan note, Mar. 22
- Fujian Sunshine Group Co. 500 million yuan bond, Mar. 22
- Yango Group Co. note with 1.47 billion yuan outstanding, Mar. 24
- Guangzhou Tianjian Real Estate Development Co. 600 million yuan bond, Mar. 28
- Fujian Sunshine Group Co. 500 million yuan note, Mar. 29