China Property Developers’ Foundation Cracks
Chinese real estate company Kaisa with $2.5 billion in offshore debt failed to repay loans and bonds as its Hong Kong stock market listing was suspended and its credit rating placed at selective default. According to Dealogic, the sector issued $40 billion the past two years as the mainstay of the high-yield space where spreads have spurted to 1000 basis points over Treasuries for a loss so far in 2015. The builder’s short-term notes have tumbled to 25 cents on the dollar and follow falls last year by Agile and Glorious Property as executives were accused of mismanagement on below-target sales. Bond prices have held up in contrast for industry leaders Vanke and Wanda despite price declines in almost all the 40 cities tracked as local governments removed curbs and the central bank tweaked reserve requirements to allow more commercial and residential lending. Asia’s projected corporate default rate may be raised from the low single digits with the mainland troubles that may not spare even the state oil giant placing $15 billon abroad since 2009 as it confronts a revenue squeeze. The BIS has noted the outsize presence of both China and Brazil in over $1 trillion in dollar issuance over the period, and pointed to the danger of currency mismatches as the renimbi marginally weakens. It believes the amount may be understated with frequent use of offshore vehicles hiding nationality and misclassifying the investment as direct rather than portfolio as funds are sent to headquarters from affiliates. Emerging market corporates raised $370 billion in 675 deals in 2014 by Dealogic figures with Asia accounting for half. Chinese borrowers with $215 billion are ahead post-crisis, followed by Brazilian ($190 billion) and Russian ($125 billion) ones with economic slowdown and softer currencies in store for the trio. The CEMBI universe must meet $100 billion in maturities and $85 billion in coupons this year, sources estimate, a jump from 2014 when the index returned 3.5 percent and dedicated fund inflows were resilient unlike sovereign counterparts. Participants cited continued buoyancy in primary markets but noted meager secondary trading without dealing capacity in view of asset class priority and regulatory restrictions through Dodd-Frank and Basel III provisions. The IIF completed a recent study of general EM debt market-maker erosion since 2000 finding an 85 percent volume and 50 percent trade size drop in proportional terms along with wider bid-ask margins.
The World Bank joined the chorus of private sector debt concern in charting a 40 percent recent household and corporate rise in its January Global Economic Prospects update. For sovereigns it offered a series of threshold indicators for caution such as external debt/GDP in the 30-50 percent range and 135 percent for short-term obligations/reserves. Most developing counties were not an imminent risk but often flashed warnings with the measures, which will always be cast within the global market structure on near-term shifting ground, the Bank suggests.
