Bond prices of mainland China property developers have plunged as falling property sales and a government-induced credit crunch have raised investors’ fears of further debt defaults.
FSA looked at some of the real estate developers with strapped liquidity and the allocation to those companies by some of the largest Asian high yield fixed income funds, with access to Morningstar Direct data.
The latest beleaguered firm is Sinic Holdings, which told investors last week that they will not be able to repay the principal of $250m 9.5% notes when they mature on 18 October.
The company has been downgraded by Moody’s Investors Service and Fitch Ratings to Ca and C respectively due to its weakening recovery prospects for its bondholders.
As of the end of June, the BEA Union Investment Asian Bd &Cc Fund held 4.55 million units of the firm’s notes, or 0.54% of its total AUM, which is a sharp deallocation from 10.45 million units at the end of 2020.
The Blackrock BGF Asian High Yield Bond and the HSBC GIF Asia High Yield Fund allocated 0.51% and 0.21%, respectively, of their total AUM to the company’s bonds as of the end of August.
Under the China government’s “three red lines” policy, Sinic Holding has failed to meet one liquidity criteria by having a net gearing ratio of 93%, putting the company in the “yellow camp”
The three red lines constitute a 70% upper limit for a developer’s debt-to-asset ratio after excluding contracted sales, a 100% upper limit for the net debt-to-equity ratio, and a one-to-one down limit ratio for cash against short-term debt.
Companies that fail to meet one or more “red lines” will be cut off access to new bank loans.
Just 11 days after China’s second-largest property developer Evergrande had failed to pay a $83.5m coupon to its offshore creditors, another Chinese real estate company, Fantasia missed the payment of its maturing $500m 7.375% notes in early October.
Since the Fantasia bonds did not have a grace period, they have defaulted and have likely triggered cross defaults for the firm’s other bonds.
Prior to its default, Morningstar data showed Blackrock and HSBC had increased exposure to the company’s notes.
Blackrock has reported an increase of net allocation of 16.85m units of the company’s bonds year-to-August, while the portfolio weighting dropped from 3.33% to 1.07%. HSBC’s total exposure to Fantasia also plummeted to 0.92% from 2.54% during the same period while its net allocation increased 11.55m units.
On the other hand, the Fidelity Asian High Yield Fund, which had a 0.85% allocation to Fantasia as of the end of 2020, had sold all its units of the property developer’s notes by August, while the Allianz Dynamic Asian High Yield Bond Fund also reduced its holdings by 381,000 units.
Modern Land China
Modern Land has announced the launch of a consent solicitation to extend the maturity of its $250m of outstanding notes due 25 October by three months to 25 January 2022. The company is also trying to shorten the notice period for the optional redemption of the bond and to redeem $87.5m of the principal amount of the bond.
Since the start of the year, HSBC increased its net allocation to the real estate developer by 13.62m units by the end of August, with the portfolio weighing up to 0.47% from 0.13%.
Blackrock also bet hard on Modern Land. The number of units jumped from 6.16m in December last year to 40.46m in August, while the exposure increased from 1.84% to 2.22%.
Although Fidelity also holds some of Modern Land’s bonds, the exposure is insignificant.
Due to the uncertainty to repay all its short-term maturities, Moody’s and Fitch have downgraded the company to Caa2/Caa3 and C respectively.
Under the “three red lines” policy, R&F Properties has failed to meet all three liquidity thresholds as of September and remain one of the most vulnerable companies in the industry.
While Allianz retained a similar position in the company, most other asset managers went on a shopping spree for the notes issued by its special purpose vehicle, Easy Tactic Ltd.
Fidelity’s net allocation to the company almost doubled to 79.64m units during the first eight months of the year, while HSBC also reported a net increase in allocation to 53.70m units from 11m units during the same period. Blackrock’s net exposure to the company increased to 37.60m units from 10m units during the same period.
For the first half of 2021, BEA Union also increased its allocation to 23.30m units from 6.23m units.
The company was brought under the spotlight after there were circulating rumours on missed coupon payments and default on onshore loans in early September, which were then refuted by the company.
Nonetheless, Moody’s has downgraded the company to B2 due to its weakened access to offshore funding and a sizable amount of maturing debt which posed significant risks to refinancing.
Hard line approach
As these companies wrestle with debts, the People’s Bank of China governor Yi Gang told the press on Sunday that the country is now facing challenges from “mismanagement” at certain companies.
He added that the country will be vigilant to contain the risk from the spillover of Evergrande, the Guangzhou property developer which has more than $300bn in liabilities and has already missed five rounds of interest payments on its offshore bonds in the past month.