Evergrande contagion risk has China junk bond yields soaring

[HONG KONG] Concern that the liquidity crisis at China Evergrande Group will worsen is hammering China's dollar junk bonds and potentially raising the cost of borrowing for real estate companies.

Yields on the notes, which are dominated by property firms, rose to 12.9 per cent on Friday, a Bloomberg index shows. That's the highest since March last year when concern over the coronavirus pandemic roiled markets.

The broader selloff continued Monday with the bonds falling as much as 0.5 cent on the dollar, according to credit traders. Tougher rules on leverage and a regulatory crackdown on the property market are weighing on indebted real estate companies.

Moody's Investors Service last week lowered its outlook on the industry to negative from stable, and said falling sales, liquidity and cash flows will increase refinancing risks for weaker developers in particular.

Property firms need to repay or refinance some US$14.6 billion in dollar notes maturing through the end of this year. Dollar bond sales in August by Chinese developers were the lowest since the Chinese New Year lull in February, and were just 14 per cent of January's volumes, Bloomberg-compiled data show.

Evergrande warned last week it risks defaulting on its debt if asset disposals fail to materialise. The company said on Friday contracted sales, including those to suppliers and contractors to offset payments, dropped 26 per cent compared with a year ago.

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Concern is building about the financial health of other Chinese developers, including Fantasia Holdings Group, Central China Real Estate and Guangzhou R&F Properties.

Moody's lowered its rating on Guangzhou R&F by one notch to B2 on Friday and put the builder on watch for further downgrade, citing increased refinancing risks. Guangzhou R&F's note due 2023 is at 58.4 cents after plunging 18.7 cents last week.

The firm has a US$200 million dollar note maturing Sept 27, while Fantasia has US$752 million in offshore bonds coming due through the end of the year including US$208 million due in October, Bloomberg-compiled data show.

Evergrande's dollar bond due 2025 is indicated at 25.2 cents on the dollar Monday after falling 10.9 cents last week, its biggest drop since the end of July, Bloomberg-compiled prices show.

BLOOMBERG