Total loss of investors cost $130bn on China developers’ dollar bonds

Investors are pricing in almost $130 billion in losses on Chinese property developers’ dollar debt on mounting worries the country's housing market will face a protracted crisis unless Beijing steps in with a large-scale bailout.

Two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for distressed status, Caliber.Az reports citing Financial Times.

The rising pressure on the market comes a year after Evergrande, the world’s most indebted developer, began spiralling into default, unleashing tumult throughout a sector responsible for roughly 30 per cent of the country’s annual economic output. Beijing’s response has been limited to incremental measures, including a cut this week to the mortgage lending rate.

But analysts said policymakers’ refusal to launch a sweeping bailout may only add to the ultimate cost of rescuing the industry and could worsen the fallout for global markets and trade as Chinese growth grinds slower.

“With the industry headwinds and negative news, it’s very clear many more developers’ offshore [dollar] bond prices have fallen sharply since last year,” said Cedric Lai, a senior credit analyst at Moody’s Investors Service. “We still believe defaults will continue through the rest of 2022, particularly for developers with large offshore debt maturities and weak sales.”

Many developer dollar bonds are now priced at a level that implies a very high risk of default. One bond maturing on September 7 issued by Kaisa Group, one of the first in the sector to miss a dollar payment late last year, is priced at $0.09 on the dollar, implying a loss of about $272 million on the principal of $300 million. A bond of the same size from Shanghai-based Shimao maturing in just over a year is priced just below $0.1 on the dollar, indicating a potential $268 million loss.

Taken in aggregate, investors have priced in almost $130 billion of losses on the more than $200 billion in outstanding dollar bond repayments owed by Chinese real estate groups, reflecting a discount of nearly two-thirds to the market’s presumed value if all repayments were made successfully.

China’s real estate groups have missed payments on a record $31.4 billion worth of dollar bonds in 2022. The companies have faced particular strain due to maturity walls, in which several developers are expected to pay back principal, or the amount they initially borrowed, at once. Companies often seek to roll over borrowings into newly issued debt to extend these maturities, but ructions in the market have made this nearly impossible for most issuers.