Chinese corporate dollar bonds hit as Beijing tightens credit

When China Fortune Land Development missed a payment on a US $ 530 million bond in February, the real estate developer did not rush to let investors know.

“They never even said ‘we defaulted’,” recalled one of the company’s offshore investors, who only found out through a third-party trustee. The investor added that advisers at China Fortune, whose bondholders include BlackRock and HSBC, said they should wait until the onshore debt bonds are dealt with first.

China Fortune, which is building industrial parks and owing an additional $ 4 billion, is among a series of large corporations across the country facing repayment pressure as Beijing tightens credit conditions. With more than $ 100 billion in debt borrowed by Chinese companies in international markets maturing this year, global investors are running out of steam.

Last year, Chinese companies have defaulted on a record $ 7.3 billion in offshore dollar debt and $ 22.7 billion in renminbi-denominated bonds. In 2021, they missed payments on nearly $ 3.3 billion in dollar bonds, according to rating agency Fitch, as much as was expected in a full year before the pandemic.

Other names that worry investors include Founding group of Peking University, a state-backed conglomerate that owes billions of dollars in offshore debt and is undergoing restructuring.

China Fortune declined to comment.

These pressures come like Beijing seeks to balance a strong economic recovery from Covid-19 with high debt levels. “It is quite clear that the Chinese government wants a more streamlined credit market,” said Jimmy Lim, managing director of Modular Asset Management, a Singapore-based hedge fund.

The prospect of defaults has also forced international investors to reassess the Chinese government’s support for financially strapped companies. Foreign investors have long assumed that Beijing would bail out state-supported groups.

Concerns over government support have been fueled by the situation at China Huarong Asset Management, the country’s largest troubled debt manager, which owes $ 22 billion in dollar denominated debt. The price of some offshore bonds issued by the group, majority owned by the finance ministry, collapsed to 57 cents on the dollar last month after delaying the release of its financial results for 2020. The former chairman of the company was executed in january for financial crimes.

The same Huarong bonds are now trading at 66 cents on the dollar.

Chinese issuers face their biggest wave of dollar bond maturities this year at $ 118 billion, according to Refinitiv. But even that is overshadowed by the 7.8 billion rmb ($ 1.2 billion) of onshore debt maturing in 2021. The latter figure could have big ramifications for offshore bondholders, especially if the restructuring onshore debt is a priority.

“What happens on land will clearly determine what happens overseas,” said Soo Cheon Lee, founder and chief investment officer of SC Lowy, a struggling Hong Kong-based credit manager. In the case of China Fortune, he added, “even the guys down on the ground find it hard to understand what’s going on.”

The restructuring process in China can be slow. More than a fifth of the companies that have defaulted since the start of 2018 have not completed their restructuring, said Shuncheng Zhang, associate director of China business research at Fitch.

Overseas defaults are usually resolved by Chinese courts, Zhang said, which means they take much longer than out-of-court deals typically prefer offshore bondholders.

The case of China Fortune was complicated by the presence of powerful onshore investors. Ping An, one of the world’s largest insurers, is both an investor and a member of the real estate group’s creditors committee. Other members of the committee include China’s national banking and insurance regulator and the cash-strapped government of Hebei Province, whose failure to pay China Fortune for work on infrastructure projects has helped. in its default.

The offshore bondholders who collectively hold more than $ 1.5 billion in China Fortune debt have formed their own committee.

Ping An was impacted by $ 2.8 billion due to its exposure to China Fortune through debt and stocks in the first quarter. An analyst from a global rating agency said that as a result, regulators may also reconsider the level of real estate exposure that Chinese insurers should bear.

This would further drain cash from developers, who account for the majority of annual high-yield bond issuance in Asia, according to S&P.

SC Lowy’s Lee called the recent surge in missed bond payments “ironic, because China’s economic data is fantastic.” Despite strong economic growth, he said, Beijing’s reluctance to bailouts meant the recent wave of defaults would likely last for years.

However, Lee said the government would take steps to limit losses for offshore bondholders, given that global investors are an important source of dollar funding for Chinese companies.

China, he said, “cannot just squeeze offshore players, because a lot of China Inc still need offshore financing as well.”

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