Developer bonds drop as Sunac deadline looms: Evergrande update

Two holders of Sunac China Holdings dollar bonds had yet to receive interest payments ahead of Wednesday’s deadline.
Image: Qilai Shen/Bloomberg

Two holders of Sunac China Holdings Ltd. dollar bonds had yet to receive interest payments ahead of Wednesday’s deadline, raising the risk that the distressed Chinese developer would default. Sunac’s junk debt and stocks both fell.

If Sunac, China’s fourth-largest developer by sales, fails to pay up a total of $29.5 million, cross-default on its other offshore debt could result. Meantime, the Federal Reserve has listed China’s housing market as one of the near-term risks to the US financial system, along with the Russia-Ukraine war and inflation.

A Bloomberg index tracking China’s junk-rated offshore notes fell for a fifth session Tuesday, hitting its lowest level since March. A Bloomberg Intelligence index of developer shares dropped as much as 0.7% Wednesday.

Key Developments:

  • China Risks Virus ‘Tsunami’ If Covid Zero Abandoned: Study
  • China’s No. 4 Developer Is Running Out of Time for Bond Payment
  • Add China’s Housing Risk to List of Fed’s Worries: China Today

China Property-Sector Shakeout May Spur Option Money Bond Plays: BI (2:09 p.m. HK)

Distressed bond valuations of Chinese developers  — with a median price of 27 cents — may provide an option-like play on potential company restructuring, according to Bloomberg Intelligence analysts Andrew Chan and Daniel Fan. Offshore bondholders may have been dismayed by their treatment compared to onshore investors, and the lack of audited results for some issuers, which likely helped to push down prices of distressed bonds.

Sunac Bondholders Yet to Receive Dollar Coupon as Deadline Looms  (1:45 p.m. HK)

Two holders of Sunac China’s 7.95% dollar bond maturing 2023 had yet to receive an interest payment as of noon Wednesday in Hong Kong, ahead of the end of a grace period.

Sunac missed an initial deadline for the coupon in April, and a 30-day grace period concludes Wednesday. The total payment due is $29.5 million, according to Bloomberg-compiled data.

Sunac Proposes More Collaterals for 4.78% 2024 Onshore Bond (1:30 p.m. HK)

Sunac China’s key onshore unit proposed credit-enhancement measures for its 4.78% 2024 onshore bond, according to a statement to Shanghai stock exchange.

The new collaterals include Chairman Sun Hongbin’s letter of guarantee and property projects in Qingdao and Zhengzhou.

China Property Managers’ Unused IPO Funds May Drive Acquisitions: BI (10:30 a.m. HK)

Major Chinese property managers with unutilized listing proceeds such as China Resources Mixc Lifestyle Services Ltd. and Poly Property Services Co. could step up in acquiring their third-party peers to boost earnings in the coming years, particularly units from debt-laden developers, according to Bloomberg Intelligence analysts Patrick Wong and Yan Chi Wong. Investors’ concerns over Shimao Services Holdings Ltd.’s financial disclosures may slow its future business expansion, they said.

Zhongliang Extends Exchange and Consent Offers to May 16 (9:20 a.m. HK) 

Chinese developer Zhongliang Holdings Group Co. extended its exchange offer and consent solicitation to 4 p.m. London time May 16 from 4 p.m. London time May 10, according to statement to Hong Kong stock exchange.

Fed Lists China’s Housing Market as Risk (8:57 a.m. HK)

In its Financial Stability Report published late Monday, the Fed listed China’s housing market as one of the near-term risks to the US financial system, along with the Russia-Ukraine war and inflation. From the Fed:

  • 1) Banks have direct exposure to developers amounting to more than half of their Tier 1 capital, and “substantial” indirect exposure from loans to other firms that are collateralised by real estate.
  • 2) Banks are also exposed indirectly through wealth-management products sold to retail investors.
  • 3) Local governments generate a significant portion of their revenues from land sales, and they too are highly leveraged. Local government debt, including off-balance-sheet financing vehicles, exceeded 70% of China’s GDP last year.

The direct impact is limited. US banks’ exposure to China amounts to less than 10% of their Tier 1 capital, according to the report. Chinese securities account for about 1% of US portfolio investment, and sales to China make up less than 5% of American firms’ revenues.

But “if the property market fallout intensifies and leads to significant strains at Chinese banks that reduce bank lending and GDP growth, the transmission of stresses to the United States could be strong,” through channels from both the real economy and financial markets, the Fed said. The report specifically mentioned the year 2015 as an example, when China’s devaluation led to volatility spikes in global markets and a dollar rally.

A-Living Target Cut 43% by CICC on Weaker Earnings Outlook (8:48 a.m. HK)

CICC slashed A-Living Smart City Services Co.’s price target by 43%, citing lower earnings forecast as the dwindling property market weighs on the company’s value-added service demand and profit margins.

Its parent Agile Group hasn’t bid for any new land since December and Agile’s contracted sales in the first quarter dropped 47% on year, which may add pressure on A-living, analysts including Yiyu Wang wrote in a note.

CICC lowered A-Living’s 2022 and 2023 earnings forecast by 5% and 10%, respectively, and lowered its price target to HK$13.6 per share, though kept its outperform rating on the stock.

© 2022 Bloomberg

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