China developers: record junk yields keep pushing limits

Credit rating agencies continue to push Chinese developers on to the junk pile, as rating cuts continue. More companies, previously not seen as high risk, are surprising markets with bad news bringing another debt crisis there. This signals that mass defaults are coming.

Logan Group, which operates prime residential and commercial properties in China’s Greater Bay Area, including Shenzhen, was downgraded three notches to CCC- by S&P Global Ratings on Friday. It cited a likely restructuring of its onshore debt plus its large amount of debt maturities. Peer Times China also received a downgrade by Fitch. Shares of both companies have plunged more than 80 per cent in the past year.

Logan has a serious crunch with about $1bn in bonds maturing this year, not much less than its market capitalisation. It has guaranteed private placement notes of around a similar amount, which it now may have to repay. Its three-year dollar bond fell to 13 cents on the dollar on Friday from 95 cents in December.

That plunge underscores a recent trend in the Chinese property sector. Even developers that had otherwise shown no signs of credit trouble have taken sudden turns for the worse. This past week was a record for Chinese junk dollar bonds as the average yield hit a record 26 per cent. More than half of all high-yield offshore notes of local developers trade below 50 cents on the dollar, according to Bloomberg data.

This sell-off is not overdone. Markets may have underestimated the undisclosed debts these property groups hold, which could exceed the risks visible on available financial statements. These hidden debts include trust loans. Developers may borrow from trust companies after they have exhausted their bank credit lines. Of the Rmb16tn ($2.5tn) worth of investments made by Chinese trust companies, more than a tenth went into real estate last year.

Just when China’s property developers may have thought the worst was over, collapses of local junk bond prices signal that even tougher times lie ahead.


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