Crisis in China’s property market deepens as developer asks creditors for breathing space to repay corporate bond

  • Modern Land has requested that investors postpone the maturity date of a £183 million bond from October 25 to January 25.
  • On that day, Modern Land’s April 2023 bond with a 9.8 percent coupon fell more than 25% to 32.25 cents.
  • The slide highlighted the Chinese property market crisis, which has centred on Evergrande and could spill over into the global economy.

China’s property bonds fell across the board today after a developer requested a delay in the repayment of a credit that was due in a fortnight.

Property

Modern Land requested that investors postpone the maturity date of a £183 million bond from October 25 to January 25 in order to ‘avoid any potential payment default.’

According to financial data provider Duration Finance, the real estate firm’s April 2023 bond, which pays an interest rate of 9.8 percent, fell more than 25% to 32.25 cents on the day, while the company’s shares fell more than 2%.

The slide highlighted the Chinese property market crisis, which has centred on Evergrande and could spill over into the global economy.

The company is in debt to the tune of more than £220 billion, and it is now waiting for word on £108 million in looming debt coupons.

Bonds issued by other property developers were also under pressure.

Property

The October 2022 bond of Ronshine China Holdings fell 12.9 percent to 52.187, while the February 2023 bond of Guangzhou R&F Properties Co fell 8.37 percent to 55.233.

Clarence Tam, fixed income portfolio manager at Avenue Asset Management in Hong Kong, commented on the downward trend, saying, ‘It’s a disastrous day.’ Even investment-grade bonds are trading at around 80 cents on the dollar.

‘We believe it is due to global fund outflows.’ It’s unusual to see minus 10 points… these IG quality bonds are typically liquid. And, fundamentally, we are concerned that onshore mortgage management will have a significant impact on the developers’ cash flow.’

Property

In equity markets, the Hang Seng Property and Construction sub-index fell 0.4 percent, while the broader index rose nearly 2 percent.

The latest drop in property bonds comes after a week of heavy selling of Chinese high-yield dollar debt, particularly after smaller developer Fantasia Holdings Group Co missed a £151 million international market debt payment deadline.

The option-adjusted spread on the ICE BofA Asian Dollar High Yield Corporate China Issuers Index was 2,069 basis points on Friday evening US time, the widest ever recorded.

Last Friday, advisers to offshore bondholders expressed their desire for greater transparency from Evergrande, as well as more information about the company’s plan to divest some businesses.

Hui Ka Yan, once China’s richest man, runs the company, which claims to have built homes for over 12 million people since its inception in 1996.

This year, the stock has dropped by 80%.

Property

On October 4, the stock was suspended on the Hong Kong stock exchange pending a “major transaction” involving the sale of a 51% stake in its property management division for £3.7 billion.

Expectations are that it will make semi-annual payments on its April 2022, April 2023, and April 2024 dollar notes, which are due on 11 October, as it prioritises onshore creditors and remains silent on its dollar debt obligations.

As a result, offshore investors are concerned about the possibility of large losses at the end of 30-day grace periods.

by Rachel Buscall

by Rachel Buscall

Co-Founder & Managing Director at New Capital Link. Having started her career in the financial sector, Rachel demonstrated a natural flair for entrepreneurship.

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1. You could lose all the money you invest

If the business offering this investment fails, there is a high risk that you will lose all your money. Businesses like this often fail as they usually use risky investment strategies. 

Advertised rates of return aren’t guaranteed. This is not a savings account. If the issuer doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. A higher advertised rate of return means a higher risk of losing your money. If it looks too good to be true, it probably is.

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This makes it difficult to predict how risky the investment is, but it will most likely be high.

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A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest

If you are interested in learning more about how to protect yourself, visit the FCA’s website here: https://www.fca.org.uk/investsmart

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