As Evergrande totters, cracks in stressed Chinese developers widen as rating outlook dims and borrowing costs jump
- Spotlight is on Guangzhou R&F and Fantasia Holdings following a downgrade in their rating outlooks
- A measure of offshore borrowing costs for junk-rated Chinese companies climbed above 15 per cent last week from 10 per cent in June: ICE data
The effective yield on bonds sold by Chinese junk-rated companies, a measure of funding cost, jumped last week to 15.8 per cent, according to an index compiled by Intercontinental Exchange, up from 10.5 per cent on June 30. The 226 bonds in the index, dominated by property names, have lost 7.4 per cent on average this month, taking the decline this year to 15.4 per cent.
The increase in yield and widening risk premium showed investors are demanding more compensation to own the securities issued by borrowers with weak credit ratings.
Since China stepped up its scrutiny on developers with its “three red lines” leverage targets in August last year, the taps have dried up for some industry delinquents including China Evergrande. Other companies that failed the test included Guangzhou R&F Properties and Sichuan Langang, according to a report published by Beike Research Institute in August.
“The worst part is that not only China Evergrande is collapsing, but also other Chinese home builders are drowning in the tsunami caused by it,” said Zhou Chuanyi, a credit analyst at Lucror Analytics in Singapore. “For companies with large amounts of maturing debt, a couple of months of liquidity drain could be devastating.”