Held on October 6, the IFR Asia High-Yield Webcast came at a time of renewed scrutiny over Chinese developers following a credit scare involving China Evergrande Group, Asia’s biggest issuer of high-yield bonds. A document circulating on social media appeared to show Evergrande warning of systemic consequences if it failed to win approval for a long-delayed domestic listing by January, when investors could demand repayment of Rmb130bn (US$19bn). The company dismissed the document as fake, but fears of a liquidity crisis knocked 20 points off its US dollar bonds and hammered its share price in late September, only for prices to rebound just as sharply days later after Evergrande said investors had agreed to roll over at least Rmb86bn of that total. Buddhika Piyasena, head of Asia Pacific corporates at Fitch Ratings, said the incident made it clear that authorities are not making exceptions in relation to domestic listings for Chinese property companies – even for a large player like Evergrande, which Fitch rates at B+ with a stable outlook. The backdoor listing of Hengda Real Estate, Evergrande’s main onshore property arm, has been held up in China’s approval process since 2016. Evergrande’s predicament has become more complicated since regulators unveiled new policies restricting highly leveraged developers from taking on additional debt. Piyasena sees the increased oversight as a prudent move for a sector that accounts for 15% of China’s GDP, including ancilliary businesses. But he expects it to be a gradual process. “The government really wants to reduce the risk in the sector. They want to manage risk down,” he said. “We don’t think the government is going to create a systemic risk by trying to avoid one.” Nonetheless, the Evergrande saga has given investors pause for thought, dragging prices down across the sector. The average yield on Asian high-yield bonds has jumped to 7.6%, according to the JP Morgan Asia Credit Index, up from 7% in early September, when it came within a whisker of February’s pre-Covid levels. As of October 6, the spread between Single B and Double B China property bonds has widened 60bp-80bp for two and three-year paper in just a month. “Valuations have been reset from the summer’s peak in performance, especially for lower rated property bonds,” said Monica Hsiao, CIO and founder of hedge fund Triada Capital. “Since March and April we saw a huge rebound given all the liquidity chasing yields, and in recent weeks – especially post the Evergrande saga – bonds have been repriced with wider dispersion. What has come out of it is more credit differentiation which is actually good for people like us who focus on fundamentals.” Chen Yi, head of global capital markets at Haitong International Securities, said China’s curbs on excessive debt are a very good sign for investors. “When the government wants to control the leverage in the property sector, it is a good time to buy more bonds, if you are confident in the sector and in the name,” he said. RED LINES Chinese regulators in August introduced a pilot scheme requiring 12 developers to submit financial data each month. The guidance sets three “red lines” measuring leverage, gearing and liquidity. Companies will be allowed to increase their debt by 5% per year for passing each of the three ratios, up to a maximum of 15%. The guidelines are expected to be rolled out to all major developers by early next year. To stay within the red lines, developers must maintain a liability-to-asset ratio (excluding advance sales and contract liabilities) of no more than 70%, net gearing of no more than 100%, and unrestricted cash to short-term debt of at least 1x. Albert Yau, CFO and executive director at property developer Zhongliang Group Holdings, described the policies as “quite reasonable”, noting that developers can
