China’s bond market slides as Evergrande’s 3rd missed payment hammers the property sector, while smaller rivals scramble to avoid default

China’s bond market slides as Evergrande’s 3rd missed payment hammers the property sector, while smaller rivals scramble to avoid default

China’s bond markets were hit as some holders of Evergrande’s US bonds with coupon payments due Monday said they were yet to receive them, adding to the company’s crisis.

Evergrande missed making coupon payments on a 9.5% note due in 2022 and a 10% bond due in 2023, Deutsche Bank strategists said. Its bonds were last trading at between 21 to 22 cents on the dollar, according to the Financial Times. The developer’s total interest owed now amounts to $148 million.

“The key for offshore holders is the next couple of weeks and whether any payment or communication will come from the company in relation to its first missed offshore coupon,” Craig Erlam, a senior market analyst at OANDA, said.

Erlam added it’s “highly unlikely” Evergrande would make its third payment, considering how its last two deadlines went.

Yields on an ICE index that tracks Chinese corporate issuers in the Asian dollar high-yield market have risen to 22% since Friday, the highest level since 2009, compared to 13% at the start of last month and 10% in June, the FT reported.

Meanwhile, credit default swaps on five-year Chinese sovereign bonds have risen 8 basis points so far this week to 59 basis points, their highest since April 2020. The increasing cost of insuring against a potential sovereign default is said to be linked to the mounting problems in the property market.

An index that measures the performance of both investment-grade and high-yield US dollar-denominated debt by property and real estate developers fell to 452, its lowest since 2016, according to Bloomberg data.

There were further signs of stress in the property market, with rival developer Sinic Holdings saying it was likely to default next week as it doesn’t expect to pay the principal, or interest, on a $250 million bond due October 18. The group has one bond payment due at the start of next week, but that bond was already down 75% in price, according to Reuters, while shares in Sinic plunged 87% on Tuesday.

Modern Land has also asked investors for permission to defer repayment of a $250 million bond due later in October. The company’s April 2023 bond with a coupon of 9.8% tumbled over 25% to 32.25 cents on Monday, Reuters reported, citing data from Duration Finance. Modern Land shares have lost over 40% this year.

The worsening situation highlights the impact of Evergrande, which is struggling with a crushing $305 billion in debt, on the high-yield Chinese bond markets, as property sales collapse and liquidity dries up. Fears of financial contagion from Evergrande triggered a global rout and sent stocks skidding late last month.

Last week, luxury developer Fantasia Holdings defaulted on a $206 million bond.

As Evergrande is entangled in a massive liquidity crunch, it’s grappling with repayments to over 80,000 people holding around $6 billion worth of its wealth management products, including many employees.

Recent developments indicate that China will work to contain the damage from Evergrande, and the country has the resources to do so, Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, said in a Monday note. “A systematic demolition of Evergrande would run counter to the country’s Common Prosperity initiative,” he added.

Trading in Evergrande and its property service unit has been halted in Hong Kong, ever since the latter pointed to a potential takeover offer last week.

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