Absence of embattled Chinese developers expected to rein in Asia’s dollar bond supply in 2022

Chinese property developers unlikely to regain full access to bond investors’ capital after default surges in 2021, bankers say

The developers were absent from Asia’s dollar bond market in the first week of the year, in sharp contrast to a year ago

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A view of the Evergrande Center building in Shanghai on September 22, 2021. Photo: AFP

Published: 8:30am, 10 Jan 2022

An absence of bond issuance from China’s property sector will likely cap supply from Asia’s ex-Japan bond market this year, as investors have turned cautious towards the cash-strapped sector after several embattled developers pushed the default rate higher last year.

US dollar bonds from Chinese issuers traditionally account for half of Asia’s high-yield bond market, with the country’s developers making up a significant chunk of what are also known as “junk bonds”, or those rated below BBB- by S&P Global and Baa3 by Moody’s.

While the Asia ex-Japan bond market kicked off the new year with an eventful first week, when three issuers including the Airport Authority in Hong Kong, and Indian conglomerate Reliance Industries raised a combined US$11 billion, a dry spell poised for Chinese property developers will likely curb growth in total bond issuance for the rest of the year, bankers and money managers said.

“Investors are more selective within the sector and currently prefer what they perceive as better-quality issuers with less [need] for getting imminent refinancing,” said Leong Wai Mei, a Singapore-based portfolio manager for fixed income at Eastspring Investments.

Bank of America expects US dollar bond issuance from Asian issuers, including investment-grade and high-yield bonds, to total about US$325 billion this year, dragged down by a 35 per cent decline in high-yield deals that are expected to total US$54 billion.

Chinese developers, many of them rated as high-yield, raised a total of US$40.8 billion in 2021 through US dollar bond issuance, Bloomberg data shows, down 30 per cent from US$57.9 billion in 2020.

Bankers and fund managers said there was no publicly issued bond deal from Chinese property developers in the first week of the year. That is in contrast to the active market during the same period last year, when several Chinese developers such as Yuzhou Group, Zhenro Properties, and Redsun Properties pumped the market with high-yield bond sales, with each raising between US$300 million and US$500 million per deal, data from Refinitiv shows.

News about defaults from beleaguered developers – including China Evergrande, the most indebted developer in the world with more than US$300 billion in liabilities, and Fantasia Holdings, which was downgraded to default or near-default status by international rating agencies last October – pushed default rate of the sector to 8.9 per cent in the first 11 months of 2021, up from 0.8 per cent at the end of 2020. Bank of America expects this to surge to 31 per cent this year.