Posted inFixed Income

Bond managers react differently to Evergrande debt crisis

Despite the drop in prices, some fixed income managers increased exposure to the Chinese property developer during the past two months, said Morningstar.
Banknote currency Chinese Yuan (CNY or RMB) and wooden house block for property and land business concept

China Evergrande Group, one of the biggest Chinese real estate developers and Asia’s largest junk bond issuer, is now standing on the precipice of defaulting on its massive debt.

The fear of the firm failing to repay has sent both stock and bond prices plunging to new lows.

Yet, although the total exposure to Evergrande’s dollar bonds is on the decline, manager research analyst at Morningstar Patrick Ge has seen mixed attitudes among bond managers, with some prepared to raise allocations.

“We’ve seen a few funds adding to Evergrande between July and August 2021, given widening spreads and attractive valuations. This is in line with what we have heard from some managers where they said that at its current levels, they believe Evergrande is a buy,” Ge says.

When looking at the six largest Asian high yield fixed interest funds, Morningstar Direct data found UBS, HSBC and Blackrock have been accumulating more units of Evergrande bonds over the past year.

The Blackrock BGF Asian High Yield Bond Fund increased its net allocation of 31.3m units in Evergrande during the first eight months of the year. The fund now has 1% of its AUM invested in the real estate giant, 0.5 percentage points higher than the JP Morgan Asian Credit Index. Nonetheless, the overall impact on the portfolio is a smaller position due to a fall in the bond’s market value.

HSBC added 40% more units of the property developer’s notes to its HSBC GIF Asia High Yield bond fund during the first seven months of the year, while UBS’s Asian HY Fund bought an extra 25% of units year-to-May. Yet, Morningstar noted that the exposure to Evergrande of the two funds has decreased due to the dropping bond price.

Selling pressure

Other asset managers are taking a more cautious approach, with Fidelity, Pimco and Allianz being net-sellers of Evergrande bonds between January and July, owning 3%-47% fewer bond shares.

In case of a default, the Morningstar analyst believes the government may not bail Evergrande out.

Unlike the debt crisis faced by Huarong Asset Management, a state-owned financial asset management company in China, “Evergrande is primarily a property development firm, with small exposures to businesses like electric vehicles. Its bonds are ultimately high yield issues.”

The firm has to pay an $83.5m coupon for its 8.25% five-year dollar bond, and a $36m coupon for an onshore bond today.

Hengda Real Estate Group Co Ltd, a Shenzhen-listed unit of the property developer, issued a notice on Wednesday, that it would make a bond interest payment for the onshore bond on time after private negotiations with bondholders, but did not mention the offshore bond.

It is estimated that the conglomerate has a total of $300bn of bonds outstanding, and has to pay $669m of coupons by the end of the year.

Chairman of the embattled firm, Xu Jiayin, sent a letter to his employees ahead of the Mid-Autumn Festival calling for solidarity.

“I believe that through the collective efforts and hard work of our leadership team and all our employees, we will walk out of the darkness soon. We will be able to push toward resumption of work and production, and fulfil the promises of delivering properties to our buyers.”

Part of the Bonhill Group.