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Chinese Property Bonds Hammered by Weak September Sales and a Surprise Default

Shrinking condo gross sales and an sudden default have stoked contemporary investor issues about China’s property builders, inflicting a steep selloff in U.S. greenback bonds from most of the sector’s debt-laden firms.

On Wednesday, merchants stated dozens of greenback bonds bought by Chinese language real-estate firms tumbled in worth, pushing yields on these bonds increased. The selldown prolonged sharp declines logged the day past, reflecting rising investor pessimism after luxurious developer

Fantasia Holdings Group Co.

failed to repay $206 million in dollar bonds that matured on Monday.

Some builders’ gross sales figures for September have additionally confirmed a big drop in home-buyer demand, after embattled property big

China Evergrande Group

ran wanting money and was forced to halt construction at a few of its unfinished residential tasks.

The weak numbers partly mirror China’s broader efforts to tame the housing market, whereas Evergrande’s issues might need additionally made Chinese language residents much less prepared to place down cash for brand spanking new properties constructed by different non-public builders, analysts say.

Debt issued by firms akin to

Kaisa Group Holdings Ltd.

,

Redsun Properties Group Ltd.

, and

Yuzhou Group Holdings Co.

tumbled in worth. An 11.25% bond from Kaisa due in April 2022 dropped to lower than 73 cents on the greenback by late Wednesday in Hong Kong, down from greater than 86 cents at the beginning of Tuesday, in response to Tradeweb.

An ICE BofA index of high-yield greenback bonds from Chinese language firms confirmed a yield of greater than 17% on Tuesday, its highest in almost 10 years. Property bonds make up a big a part of the gauge.

“Buying and selling has been extraordinarily lively. It has been very uneven; markets are very nervous,” stated Michel Lowy, the chief govt of SC Lowy, a monetary establishment specializing in distressed and high-yield debt.  ”It’s not simply Fantasia. That was materials, however seeing builders come via with fairly horrendous gross sales numbers for September is just not serving to,” he added.

Paras Gupta, head of discretionary portfolio administration for Asia at Union Bancaire Privée, stated the promoting has additionally unfold to bonds of Chinese language builders which can be on a firmer monetary footing. “It’s now a full-blown threat aversion to this sector,” he stated.

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An ICE BofA index of high-yield greenback bonds from Chinese language firms confirmed a yield of greater than 17% on Tuesday, its highest in almost 10 years.



Photograph:

jerome favre/Shutterstock

A bond due in 2031 from

Country Garden Holdings Co.

, one among China’s bigger and financially stronger builders, was quoted Wednesday at about 88.75 cents on the greenback, in response to Tradeweb.

The primary set off for the latest declines was Fantasia’s bond default, which occurred simply days after Evergrande missed a second interest payment deadline on a set of greenback bonds. Whereas Evergrande has a 30-day grace interval earlier than its offshore buyers can declare a default, there was no grace interval on Fantasia’s bond that matured Monday.

Fantasia’s nonpayment stunned buyers as a result of the Shenzhen-headquartered developer had not too long ago stated it had no liquidity points, and indicated it had sufficient money to repay the excellent quantity on a five-year greenback bond it issued in 2016. Fantasia, like Evergrande, was an lively issuer of high-yield greenback bonds in the previous few years.

Some market members surmised that Fantasia and its controlling shareholders had elected to not repay the corporate’s worldwide debt, which raised doubts as as to whether different Chinese language builders may do the identical to preserve money or give precedence to their onshore collectors.

“Market confidence is shattered by the latest occasion, which has triggered a reassessment by buyers of sponsors’ willingness to pay,” stated Jenny Zeng, co-head of Asia Pacific fastened earnings and a portfolio supervisor at AllianceBernstein in Hong Kong.

She stated about half of China’s high-yield property bonds have been now buying and selling at yields of above 20%—implying a excessive default threat for these firms and making it exhausting for them to refinance coming money owed.

Final month was probably the worst September for trade gross sales prior to now 20 years, CCB Worldwide analyst Lung Siufung wrote in a notice to shoppers Monday, noting that September and October are historically the height season for residence gross sales in China.

Citing statistics from CRIC, a knowledge supplier, Mr. Lung stated that common contracted gross sales for key builders dropped 28% in contrast with September of final yr.

Some particular person builders have additionally reported steep drops in gross sales. Hong Kong-listed Kaisa stated this week that contracted gross sales in September totaled 5.7 billion yuan, equal to $884.3 million. That was down 28% from a month earlier.

Evergrande, in the meantime, earlier warned of a steep drop in September contracted sales following declines over the summer season.

Costs of junk bonds are actually implying that buyers count on extra bond defaults amongst Chinese language builders.

“The market is assuming the worst and with out authorities intervention, the diploma of misery priced into belongings could materialize,” stated Paul Lukaszewski, head of company debt for the Asia Pacific area at asset-management agency Abrdn.

Mr. Lowy at SC Lowy stated a number of measures may assist stabilize the market, together with authorities easing of coverage, maturing greenback bonds being paid off as promised by builders, and Evergrande and Fantasia outlining cheap restructuring plans.

China Evergrande Group: Stalled Building, Huge Money owed

Write to Frances Yoon at frances.yoon@wsj.com and Quentin Webb at quentin.webb@wsj.com

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