Asia Bi-Weekly: Reality Check (March 7-21)
From Reorg Asia’s Managing Editors
In this column, managing editors Stephen Aldred and Shasha Dai take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, Southeast Asia, India and Australia. For questions or comments, contact Stephen at firstname.lastname@example.org and Shasha at email@example.com. Send your people and fund news to firstname.lastname@example.org.
High-yield bonds of Chinese real estate developers regained some ground on March 16 and March 17 after a widespread selloff, as vice-premier Liu He, Xi Jinping’s closest economic adviser, announced the government would take measures to boost China’s economy in the first quarter and introduce policies favorable to the market.
The signal was reinforced when state media outlet Xinhua reported talking points from a meeting of the country’s financial stability committee, chaired by Liu, signaling a raft of investor friendly measures and indicating active support for the property sector, including through delay of property tax trials.
Policy support statements swiftly followed from the China Banking and Insurance Regulatory Commission (CBIRC), the People’s Bank of China (PBOC), and the China Securities and Regulatory Commission (CSRC), stressing stability over reform.
High-yield Chinese real estate bonds rallied on Thursday, then stalled on Friday.
Sunac sank as much as 15 points as irrational earlier gains on its bonds in the wake of the policy statements gave way to reality, and the market realized Sunac’s liquidity problems would not magically vanish overnight because of government signals of support.
The company has RMB 24 billion of offshore and onshore public bond maturities in the next 12 months, including two $600 million senior notes maturing in June and August, respectively.
S&P on March 17 downgraded Sunac to ‘B-’ from ‘BB-’, following Fitch’s March 16 downgrade, also to ‘B-’ from ‘BB-’. Both ratings agencies citing refinancing concerns.
The earlier wider market selloff was arguably technical rather than fundamental – even CIFI Holdings and Country Garden Holdings (CoGard) got sucked into the downdraft, as investors sold out to get out, or sold out to raise cash where they could.
Fears that China would support Russia’s invasion of Ukraine, rising commodity prices and rising Covid-19 cases in Mainland China all accentuated existing fears of a chaotic collapse in the country’s property market. In a risk-averse environment, investors read official industrial output numbers for January to February – which far exceeded analyst expectations – with disquiet. Those numbers, combined with the PBOC holding policy rates steady, were read as a signal that regulatory tightening would continue.
CIFI exemplified the irrational volatility. The developer is one of a select few private companies approved to register MTNs with the National Association of Financial Market Institutional Investors, a market usually reserved for state owned enterprises or companies with state backing.
Access to the regulator approved interbank bond markets had created a perception that CIFI had been selected to survive.
But on March 11, the day CIFI was building its book for a RMB 1 billion issue in the interbank market – guided at 3.5% to 4.8% and priced at 4.75% – its bonds went down 7 to 8 points.
By March 16, almost 50% of China property bonds were trading below cash prices of 20, up from 15% just two weeks earlier.
Against that backdrop, it will take more than one intervention to restore long-term confidence and stability.
While last week’s signal of support for the markets was strong, fundamental questions remain, including how statements of support translate into action.
How government support will be offered – and who gets that support – is now a fundamental question in a market where real estate companies confront a new normal where funds are no longer fungible across projects. Consumers, meanwhile, have learned the invaluable lesson that risk exists, and they remain averse to it. Liquidity sources have been shut off.
Liquidity gaps are expected to show more clearly as the annual reporting season for China’s listed property firms ends March 31. Results are expected to come late, and to be ugly.
S&P in its downgrade of Sunac noted the company faces potential debt acceleration by its offshore on-balance-sheet private placement notes holders. Most of the private notes mature within one year. The rating agency revised the China-based property developer’s liquidity to weak from less than adequate, noting that capital markets confidence was weakening rapidly.
Sunac was last week’s reality check. It may be the first to test the reality of China’s market-oriented policies.
–Stephen Aldred, Managing Editor