More Chinese Developers Are Scrambling to Dodge Debt Defaults

(Bloomberg) -- A selloff in Chinese developers’ debt is deepening, with one of the 20 biggest developers joining a host of firms looking to dodge defaults as debt crises effectively shut them out of the overseas financing market.

China’s dollar high-yield bonds are falling for an eighth-straight day Monday after tumbling nearly 9 cents on the dollar in October, closing out the worst two-month slide in a decade. Yuzhou Group Holdings Co.’s bond due 2025 tumbled 11.6 cents to 38 cents, on pace for its biggest drop in since March, while Sunac China Holdings Ltd.’s note due 2026 fell 5.3 cents to 65.5 cents.

Yango Group Co. has become the latest developer trying to improve its liquidity and avoid default by delaying near-term bond payments. The Shanghai-based builder, which ranked as the 18th biggest in the nation by contracted sales, is seeking to extend three of its dollar notes as “existing internal resources may be insufficient,” according to a stock exchange filing. 

The company’s warning of a possible default is intensifying investor concerns that developers are caught in a negative credit loop as refinancing risks prompting firms to curb spending and reduce sales. Yango shares fell as much as 9% Monday in Shenzhen, hitting a seven-year low. Several of its onshore bonds plunged to record lows, prompting trading halts. 

More property firms have been scrambling to avoid missing debt deadlines recently, as a government clampdown on the real estate sector and a liquidity crisis at giant China Evergrande Group make it tougher for firms to roll over their dollar debt. Other recent examples include Xinyuan Real Estate Co., which last month secured approval on an exchange offer for a bond.

“We will see more of such offers or even defaults in coming weeks and months,” according to Eddie Chia, portfolio manager at China Life Franklin. 

“Yango is a top developer that had normal operations, albeit slightly more leverage, but clearly it is threatened by a confidence crisis,” he said. “The other developers in the dollar bond market are much smaller than Yango, and most issuers cannot survive if the market is closed.” 

Payment extensions

Extending payment deadlines is a temporary solution. Some investors are betting that granting reprieves now will allow firms to improve their liquidity when the primary market re-opens for China’s riskier borrowers, though it’s unclear when that may happen. 

Fitch Ratings highlighted that Xinyuan’s default risks remain high, for instance, even after it raised its issuer default rating on the firm to CC from restricted default.

Though builders can delay near-term bond repayments, they may still struggle to shore up their financial health as sales slow and profits tumble. China’s top 100 developers saw new-home sales fall 32% from a year earlier in October, according to China Real Estate Information Corp. after a similar slump in September.

Rising scrutiny over China’s weakest players also means not all firms will be able to secure bond extensions. Modern Land China Co. failed to repay either the principal or interest on a $250 million bond late last month after it earlier terminated a proposal to extend the bond’s maturity by three months. 

At least four builders defaulted last month as limited access to refinancing channels threatened a wave of delinquencies. Some of China’s worst-performing dollar junk bond borrowers have some $2 billion in onshore and offshore bond payments due November. 

This week’s due payments by developers include: 

• Scenery Journey Ltd. $41.9 million coupon on note due 2022: Nov. 6
• Scenery Journey $40.6 million coupon on note due 2023: Nov. 6
• Zhenro Properties Group Ltd. $13.7 million coupon on note due 2023: Nov. 6
• Central China Real Estate Ltd. $7.79 million coupon on note due 2023: Nov. 7

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