China Evergrande crisis casts shadow on Chinese real estate sector’s outstanding US$232 billion offshore bonds, Fitch says

Together with Fantasia Holdings and Ronshine China, Evergrande has driven the bulk of the six downgrades that Fitch made during the third quarter in a portfolio of 50 major Asian high-yield corporate issuers
Funding costs for such issuers had risen to 7.5 per cent as of the end of the third quarter, from 6.3 per cent in the second quarter

Evergrande crisis

Georgina Lee

Published: 8:38pm, 5 Oct 2021

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Investors in Chinese real estate sector bonds face a number of headwinds, with a potential default at China Evergrande Group and uncertainties linked to its US$11.9 billion bonds coming due in the next two years clouding the outlook for the sector’s outstanding US$232 billion cross-border bonds, Fitch Ratings said.

With more than 70 per cent of the sector bonds that Fitch rates being high-yield notes, the fallout from Evergrande’s liquidity crisis has already squeezed funding costs for the entire Asia-Pacific high-yield companies sector, the rating agency said in a report on Tuesday. The indicative funding costs had risen to 7.5 per cent as of the end of the third quarter, from 6.3 per cent in the second quarter.

“Ongoing negative news concerning China Evergrande’s operations and potential default was the major contributor,” Fitch analysts Matt Jamieson and Buddhika Prasad Piyasena said in the report.

The developer was downgraded in three steps during the third quarter by Fitch from “B” to “C” because of its liquidity crisis. The downgrade indicates that it had most likely missed interest payments on its notes and entered a 30-day grace period before such non-payments would trigger a default. Evergrande had US$83.5 million and US$45.2 million in coupon payments linked to two of its outstanding bonds already past due on September 23 and 29, respectively.

Together with Fantasia Holdings and Ronshine China, two other Chinese developers, it drove the bulk of the six downgrades that Fitch made during the third quarter in a portfolio of 50 major Asian high-yield corporate issuers, which were chosen on the basis of their relevance to the Asian credit market.

“We expect negative actions on the portfolio of 50 issuers to continue in the fourth quarter, with the Chinese real estate sector facing a number of headwinds,” Fitch said on Tuesday.

The rating agency said that China Evergrande had the highest amount of cross-border bonds outstanding among the 50 issuers. This included maturities totalling US$6.1 billion next year and US$5.8 billion in 2023. Cross-border bonds are bonds that firms issue in the international market.

While the developer has no bonds maturing in the current quarter, it is estimated to account for 22 per cent and 20 per cent of pending maturities for this and next year, totalling US$28.2 billion and US$28.7 billion, respectively.

Moreover, Fantasia Holdings’ failure to repay US$205 million in principal due from a senior note on Monday has added to fears about the financial health of the Chinese property sector. Fitch downgraded Fantasia’s long-term foreign-currency issuer rating to “CCC-” from “B” the same day, citing the risk of default on its upcoming US dollar bonds, tighter than expected offshore liquidity and lack of transparency.

Chinese real estate sector cross-border bonds accounted for 79 per cent of Fitch’s portfolio of cross-border bonds, which are expected to total US$121 billion as of the end of 2021.