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Property bonds slump as Evergrande coupon deadline awaited

written by Bella Palmer
evergrande

Expectations that Evergrande will make the semi-annual payments on its dollar notes are slim as it prioritises onshore creditors

China property bonds slumped on Monday after a developer asked to delay a paper's maturity, underlining default fears stalking markets as offshore bondholders of China Evergrande Group awaited news of $148 million in looming debt coupons.

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

That has left offshore investors worried about the risk of large losses at the end of 30-day grace periods as the developer wrestles with more than $300 billion in liabilities.

In the latest sign of liquidity stress facing Chinese developers, Modern Land (China) Co Ltd on Monday asked investors to push back the maturity date of a $250 million bond from Oct. 25 to Jan. 25 in part to avoid any potential payment default.

Modern Land's April 2023 bond with a coupon of 9.8% plunged more than 25% to 32.25 cents on the day, according to financial data provider Duration Finance, while the company's shares dropped more than 2%.

Other property developers' bonds were also under pressure. Ronshine China Holdings' October 2022 bond dropped 12.9% to 52.187 and Guangzhou R&F Properties Co's February 2023 bond tumbled 8.37% to 55.233.

It's a disastrous day. Even investment grade bonds are trading at low 80, said Clarence Tam, fixed income portfolio manager at Avenue Asset Management in Hong Kong.

We think it's driven by global fund outflow. It's very rare to see minus 10 points. These IG quality bonds are usually liquid. And fundamentally we are worried the mortgage management onshore hit the developers' cash flow hard, he said.

In equity markets, the Hang Seng Property and Construction sub-index dropped 0.4% against a nearly 2% rise in the broader index.

The latest slide in property bonds follows heavy selling of Chinese high-yield dollar debt last week, particularly after smaller developer Fantasia Holdings Group Co missed the deadline on a $206 million international market debt payment on Oct. 4.

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

Fantasia Group China Co, whose controlling shareholder is Fantasia Holdings, said on Monday it will adjust the trading mechanism of its Shanghai-traded bonds following credit downgrades by China Chengxin International Credit Rating Co, and said its parent had formed an emergency group to resolve liquidity problems.

We believe policymakers have zero tolerance for systemic risk to emerge and are aiming to maintain a stable property market, and policy support could be forthcoming if the deterioration in property activity levels worsen, said Kenneth Ho, head of Asia Credit Strategy at Goldman Sachs.

That said, we also believe that policymakers do not want to over-stimulate, and their longer term goal is to deleverage the property sector, he said.

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