Asia’s largest junk bonds are more risky than ever โ€” and Chinese property developers may feel the heat.

KEY POINTS:

  • A leaked document last month on the cash flow of Evergrande, China’s second-largest sales developer, highlighted concerns about the liquidity flows of Chinese real estate developers.
  • This has increased pressure on property developers’ ability to repay their debts on bond markets in 2021, analysts warn.
  • China’s real estate developers are among the largest junk bond issuers in Asia.

SINGAPORE โ€” Increasing debt of Chinese real estate developers is again at the forefront, as liquidity issues at China Evergrande are triggering investor concerns.

As the economy reopened following the worst of the pandemic, China’s property prices rebounded quickly. However, authorities are expected to officially stick to developers’ borrowing costs โ€” describing rules that limit debt ratios with respect to their cash flows, assets and capital levels.

A leaked paper last month on the cash flow of Evergrande, China’s second-largest sales developer, has also highlighted concerns over Chinese developers’ liquidity flows.

Analysts warn that they have also put pressure on developers to pay off their debts in the 2021 bond markets.

China’s real estate developers are one of the largest issuers of junk bonds in Asia with a total issuance of $46.23 billion last year โ€” double that of 2018, Refinitiv data says. Junk bonds are non-investment grade debt securities with a high default risk, usually with higher interest rates to offset that risk.

Evergrande ‘s liquidity concerns

The leaked document suggested that China Evergrande had sought government assistance because of a supposed cash crunch. The company has since denied the allegations in the document.

Nevertheless, ratings giant S&P Global Ratings downgraded China Evergrande to โ€œnegative โ€ from โ€œ stable, โ€ explaining that its liquidity was weakening.

โ€œWe revised the outlooks to negative because Evergrande’s short-term debt has continued to surge, partly due to its active acquisition of property projects. We expected to deal with the company’s short-term debt, in particular in light of the tough economy, “the rating agency said.

The incident poses an event risk to China’s property market in the coming quarters. We cannot rule out the possibility of more developers facing deleveraging challenges.

“We believe that, due to the size of its debt, Evergrande faces growing challenges to improve its liquidity,” S&P added. As of 30 June, it had 396 billion yuan (58 billion dollars) in short-term debt due in part to increased land and project acquisitions as opportunities arose during the pandemic, the rating company said.

Billions of debt owing

ANZ Research recently reported that although the Evergrande event is unverified, it has “increased market concerns” over cash flow conditions and the leverage ratio for Chinese developers.

ANZ Research said that the Chinese government was also set to introduce the rules that would force companies to limit their debt that could pose even more problems for them.

โ€œThe incident poses an event risk to China’s property market in the coming quarters,โ€ it said, referring to China Evergrande. “We can not exclude the possibility of deleveraging more developers facing challenges.”

Impact of new property rules

Chinese property developers could face mounting bond repayment pressure next year, according to ANZ analysts. ANZ Research shows that by 2021 onshore bonds will mature 526 billion yuan (77.46 billion USD) which is 16 percent above this year’s level and some 50 billion USD of offshore bonds will also mature next year, or 47 percent more this year.

Tens of trillions of dollars of bonds will mature next year and analysts warn that developers need to reissue debts to raise cash may face hurdles in such tightening financing conditions.

“The new regulations may limit the capacity of developers to roll over their debt, stimulate demand for cash and dampen investment in property,” ANZ Research noted.

Senior Corporate Rating Manager Christopher Yip at S&P Global Ratings said that limiting bank loan growth could reduce prospects for growth, in particular for more aggressive players.

“The refinancing needs for the dollar for the sector in 2021 are greater than ever,” said Yip, adding that issuers can also face a weak appetite for investors.

Capital Economics also noted: “The speed at which China’s officials have turned from crisis responses to another round of property developer restrictions has surprised many.”

‘The motivation is clear to a leadership concerned with credit risks: property developers account for all the increase in the leverage between listed companies in China in the past decade,’ she said.