China’s Bond Watchers Are Missing a Big Part of the Picture

(Bloomberg Opinion) -- China’s real estate developers owe more than $200 billion in dollar-denominated bonds. Naturally, investors are trying to identify which among them might be the next China Evergrande Group, whose financial distress sent shockwaves across global markets this year.

The obvious first step is examining a developer’s bond due dates and determining whether it has the cash or enough liquid assets to sell — or if China will relent on its real estate crackdown before the next repayment looms. Can they last long enough to survive a harsh winter?

Using this method, Shenzhen-based Kaisa Group Holdings, the second-largest high-yield issuer after Evergrande, is one to watch. The developer is looking at a busy 2022. It has close to $3 billion notes due in April, June, July, September and October, on top of about $1.1 billion coupon payments. Meanwhile, China’s largest builder, Country Garden Holdings Co., which has an investment-grade rating, caused market jitters recently, probably because of its maturity schedule. 

But public bonds are just part of the story. There are tens of billions in private loans too. China’s developers routinely borrow from banks offshore. Their friendly financiers may now balk at rolling over loan facilities, thereby forcing unexpected repayments. A more meaningful maturity schedule therefore must include private borrowings too. 

The problem is that very few people know how much is owed to whom and when it’s due. Loan repayments are often staggered, and there can be trigger clauses, such as ratings downgrades or leverage breaches, which could require accelerated repayments. Since loans are private, bond traders don’t get to see the lending documents to get an estimate of the companies’ maturity schedules. They will have to do more homework. 

Even if bankers remain friendly, how do they get refinancing approved when they’re in the dark about off-balance sheet debt, or whether the borrowers are willing to honor their obligations? 

Earlier this month, Agile Group Holdings said it repaid about $489 million due from a term loan facility it entered into in May 2018. HSBC Holdings and Standard Chartered Plc were among the lenders, data compiled by Bloomberg show. Granted, Agile could have simply decided not to ask for a rollover, but does it make business sense, considering the high-yield developer has a $1.1 billion bond due in 2022 and cash is tight across the industry? Did Agile’s banks decline to refinance? The rest of the $1.5 billion term loan is due by May. 

Or consider Fantasia Holdings Group, a smallish developer whose surprise decision not to repay its dollar note triggered a market selloff in October. The company said a winding-up petition was filed against a subsidiary over $149 million of loan facilities.

With Agile, the market realized it had used offshore financing vehicles to issue dollar-denominated bonds that it guaranteed every day of the year, except for June 30 and December 31; when companies publicly report their financials, the bonds don’t need to be entered on Agile’s balance sheet. As for Fantasia, the problem is even worse. In early October, it refused to repay $206 million bonds, even though it had the money — or gave the impression so. Fantasia had claimed good liquidity and cash conditions in public filings and conference calls with investors all the way to its bond due date. Trust, an important currency in the banking world, is starting to look like toilet paper instead. 

In the last few months, developers have thrown out too many surprises. There were private bonds, private guarantees for their joint ventures, or even wealth-management products they had privately sold. Bankers who arrange private loans should be worried. they don’t know how many backroom deals their borrowers have done. 

In mainland China, ironically, distressed companies can sometimes get more breathing room. When markets get jittery, the government can tell its banks not to pull loans, to give the likes of Evergrande enough time to dispel liquidity crises and unwind their borrowings in an orderly manner. This top-down approach does not work offshore. Private loans are developers’ next pressure points. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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