China’s Developers Priced for Meltdown as Contagion Risk Spreads

(Bloomberg) -- A missed bond payment by a Chinese developer reignited investor angst about the health of the nation’s property sector on Tuesday.

Chinese junk dollar bonds were poised for their biggest selloff in at least eight years amid renewed concern that authorities will do little to alleviate the credit crisis gripping the industry. Yields are near a decade high. Developer shares tumbled, with Sunac China Holdings Ltd. and China Aoyuan Group Ltd. falling at least 10%. A gauge of Chinese stocks in Hong Kong closed at a five-year low. China Evergrande Group’s silence on a reported stake sale in a unit left its shares suspended.

Fantasia Holdings Group Co. became the latest property company to fail to repay a maturing bond on Monday, while a series of rating downgrades from global risk assessors and a slump in U.S. markets overnight added to investor jitters. Credit traders blamed thin volumes for the scale of the meltdown. Mainland China is closed for a week-long holiday, shutting off liquidity channels like stock links into Hong Kong and the central bank’s daily cash injections.

Fantasia’s missed payment “provides a clear sign that despite piecemeal bailouts of select Evergrande assets, property market stresses remain elevated,” said Craig Botham, chief China economist at Pantheon Macroeconomics Ltd. “The rot is unlikely to stop here.”

Fantasia should pose a lesser risk to markets than Evergrande due to its smaller size. It ranked only 60th in a list of contracted sales in the first quarter of this year while Evergrande was third -- and its $12.9 billion in total liabilities are dwarfed by Evergrande’s $304.5 billion. Fantasia is also a less prolific bond issuer with about $4.7 billion in outstanding offshore and local debt, Bloomberg-compiled data show. That compares to Evergrande’s $27.6 billion.

The average price of China’s high-yield dollar bonds fell about 5 cents on the dollar Tuesday, with single B rated firms down as much as 10 cents, according to credit traders. Dollar bonds of Kaisa Group Holdings Ltd. and Modern Land China Co. were set for their biggest declines in at least a year, while a Central China Real Estate Ltd. bond lost almost 11 cents on the dollar. A gauge tracking shares of mainland developers slumped 3.8%.

The declines shattered a period of calm that had been spurred by speculation authorities would support the industry and limit damage to the economy. Chinese developer shares had rebounded 11% in the previous five days -- the longest gaining streak since March -- after the central bank pledged to safeguard the real estate market and protect home buyers’ rights. The People’s Bank of China also added funds to the banking system for 10 straight days, pushing interbank borrowing costs lower.

The government is unlikely to ease its curbs on the property sector, despite the recent speculation, according to Nomura Holdings Inc. 

“Beijing’s hawkish stance on the property sector remains intact,” Nomura analysts led by Ting Lu wrote in a note dated Monday. “We expect Beijing to maintain its property-related tightening measures and a rapid weakening of the property sector to deal a severe blow to headline GDP growth and government revenue.”

The government has so far maintained strict rules that force indebted developers to reduce leverage, as well as measures aimed at preventing a bubble in home prices.

The result is refinancing debt is becoming increasingly difficult for the sector, with junk-rated or unrated real estate firms selling the least amount of notes in the third quarter since late 2017. At the same time, sales of homes are plunging. Major developers recorded a 30% drop in sales in September from a year earlier, Jefferies analysts said in a note, citing China Real Estate Information Corp. data.

Fantasia failed to repay a $205.7 million bond that was due Monday, according to a company statement. Separately, Country Garden Services Holdings Co. said that a unit of Fantasia didn’t repay a 700 million yuan loan that also came due on Monday and that a default was probable. 

Evergrande -- which is at the epicenter of investor concern -- has yet to publish an update since halting shares pending an announcement on a “major transaction.” The company agreed to sell a majority stake in its property services unit to a Guangdong-based developer, Cailian reported on Monday, citing unidentified people. Last week, Evergrande agreed to sell a 20% stake in Shengjing Bank Co. to the local government in a deal that S&P Global Ratings said marked the first step toward solving Evergrande’s liquidity crisis.

A Bloomberg index of Chinese real estate stocks is trading at less than 0.4 times book value. That shows stock traders are applying a significant discount to the value of assets held by Chinese developers -- near the largest in data going back to 2005. 

Fifteen of the country’s most stressed property developers will have $2.1 billion in bond payments due this month, according to calculations by Citigroup Inc. analysts, comprised mostly of coupons. The bill will more than double in January as principal payments come due, indicating market stress may reach another maximum around that time, the analysts wrote in a note.

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