Asian High Yield Bond Issuers Feel Evergrande Pain As Investors Consider Better Protection

LONDON / HONG KONG / SINGAPORE (Oct 6): Global investors are likely to demand more protection against riskier bond issuers in China and Asia as they seek higher yields and more transparency amid Evergrande’s financial woes Group.

Suffocating less than $ 305 billion in debt and on the verge of collapse, real estate developer Evergrande missed two payments to offshore bondholders last month and has yet to announce plans to repay those investors.

It has eight other offshore coupon repayments and one onshore due before the end of the year.

The non-payment, followed by a series of downgrades in the credit ratings of indebted Chinese developers, has disrupted Chinese high-yield debt, triggered cash outflows and now worries asset managers about issuers in the region , said investors and analysts.

Arthur Lau, director of Hong Kong-based PineBridge Investments for Asia Ex-Japan, Fixed Income, believes the heady mix of debt problems and changing regulations in China is changing the goals for foreign investors.

“These uncertainties have had a significant impact on the risk appetite of Chinese assets,” Lau said. Reuters. “A higher risk premium may justify given the unpredictability of policy reforms at this time.”

Signs of stress in China’s real estate industry are being felt: Developer Fantasia Holdings failed to pay a $ 206 million bond due Monday. Its counterpart Sinic Holdings suffered a rating downgrade on Tuesday after some units defaulted on interest payments on onshore financing agreements.

Uncertainty over when and if authorities will step in to cushion the risk of Evergrande contagion, at a time when Beijing’s regulatory crackdown has already frayed nerves and economic growth is slowing has pushed prices down sharply. obligations.

Foreign investors withdrew US $ 8.1 billion in Chinese debt in September – the largest outflow in six months – while emerging market fixed-income securities outside China benefited from an influx, according to data from the ‘Institute of International Finance.

Much of the pain is concentrated in the country’s high-yield companies: the Chinese high-yielding ICE BofA index has lost about a quarter since the start of the year, while the global benchmark and Chinese investment-grade peers barely budged.

Analysts say the steep losses on Chinese junk bonds reflect both default risk and uncertainty over how to value bonds given the unclear picture of how Evergrande’s debt can be. restructured and the ability of the authorities to stop the spread to other businesses.

At 160% of expected gross domestic GDP, China’s non-financial corporate debt is above average for advanced economies and rating agencies have consistently flagged asset quality as a concern, said Adam Slater of Oxford Economics.

“To what extent the recent increase in risk premia is proving to be permanent is not yet clear,” he said, adding that much would depend on the success of the Chinese authorities in containing the financial contagion of Evergrande.

The pressure has also been felt outside the real estate sector.

Five-year bonds issued by West China Cement, aluminum producer China Hongqiao Group and leasing company Ehi Car have seen yields jump more than a percentage point since late August.

Maturity wall

Evergrande’s reverberations are felt beyond China. Rating agency Fitch calculated that the funding costs of rated Asia-Pacific private issuers rose more than a percentage point to 7.5% at the end of September.

The top 50 issuers of high-yield Asian firms – which have $ 423 billion in debt outstanding between them – could enjoy some breathing room for now with just $ 2.6 billion in debt. maturity until the end of the year, Fitch calculates.

But that will soon change when a record $ 28.2 billion expires in 2022, followed by $ 28.7 billion in 2023, the rating agency said in its latest report.

The group is dominated by China and the real estate sector, but also includes companies from India and Malaysia to Mongolia.

Analysts also predict that the latest events will increase investor pressure for more favorable conditions.

“The lasting impact in terms of pricing could come in the form of investor insistence on improving transparency and corporate reporting,” said Jim Veneau, head of fixed income in Asia at AXA Investment. Management.

Philip Lee, Head of Debt Capital Markets for Asia-Pacific at DLA Piper, expects to see “a demand for tighter covenants in bond documentation, as well as a greater focus on collateral.” group and asset security.

Given the size of the Chinese bond market at US $ 16 trillion, relatively high yields, and growing prominence in global indices and financial markets, some are betting that investors will see through the current turmoil in the near future. to come up.

This month will see the start of inclusion of Chinese government bonds in the FTSE Russell WGBI Index – a widely followed fixed income benchmark – which could see large amounts of passive investments flowing into debt markets. from the country.

“In the long run, we think this market is just too big to ignore,” said Lau of PineBridge.

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