Default rate could improve in 2H22
China's April offshore default rate may continue to trend higher as we face another maturity wall on the same scale as the one in March. If one or more of the 557 issuers misses interest or principal payments this month, the rate could reach 4% and set a record for a third month in a row. The real-estate sector may continue to dominate defaults as 60 property developers have put-option, principal or interest payments due this month. The sector may continue to see default rates deteriorate in the short term as distressed issuers need to rely on asset disposals to obtain liquidity for debt repayment, during a pullback in contracted sales of Chinese property.
Default rates at 3.76% in March
Source: Bloomberg Quant Platform (BQuant) , Bloomberg Intelligence
The involvement of bad-debt asset managers may help to avoid failures in the disposal process, and lead the default rate to improve in 2H.
Monthly bond-default data show recent credit events were dominated by the real estate sector, and we expect the trend to continue. As of March 31, we recorded $13.3 billion of offshore dollar-bond defaults and 46.4 billion yuan ($6.9 billion) of domestic bond defaults based on bond amounts outstanding in the last 12 months, involving 21 offshore dollar-bond issuers and 13 domestic yuan issuers.
Real estate continues to dominate U.S. dollar issuer-based bond defaults and further increased (86%) on a trailing 12-month basis, while energy, health care, and consumer discretionary comprise the remainder.
Kaisa is the largest single defaulting issuer in the offshore market, based on bond amount outstanding, accounting for 31% of the total defaulted amount outstanding in the last 12 months.
Rolling 12-month defaults as of Mar 31
Source: Bloomberg SRCH <GO>, Bloomberg Intelligence
U.S. dollar issuer-based default distribution
Source: Bloomberg Quant Platform (BQuant)
Corporate actions conducted by Chinese issuers, including tender offer, exchange offer, and consent solicitation, trended higher together with the market’s default rate in March. Consent solicitation increased the most over the last month as issuers looked to amend original indentures. Corporate actions may increase further as we see more interest or maturity payments due in April.
CACT<GO> keeps you updated on all the corporate actions.
Corporate actions by Chinese issuers
Source: Bloomberg CACT <GO>, Global Data
Credit rating change: Real estate had lowest upgrade-downgrade ratio in 10 years
Sunac downgraded by four rating agencies
Source: Bloomberg RATC <GO>
Entities experiencing rating changes
Source: Bloomberg Quant Platform (BQuant), Global Data
Chinese issuers face $186.5 billion maturities
China's combined onshore and offshore corporate bond markets may face more refinancing risk arising from maturities and put options, which may point to higher market volatility. In April, 969 non-bank, non-financial issuers face a combined $188.5 billion of principal payments, equivalent to 4.2% of the market's amount outstanding. This is higher than the $171.1 billion (4.3%) of maturities in the same month last year. On a sector level, real-estate issuers have $27.2 billion of maturities, or 3.7% of the sector's total amount outstanding.
Investors may need to pay closer attention to distressed issuers which are or were due to pay interest or principal in April, especially issuers that have proposed debt exchanges.
Chinese bond market debt maturity profile ($)
Source: Bloomberg DDIS <GO>, Bloomberg Intelligence
Most negative news sentiment in December
DRAM: Offshore China issuers
Source: DRAM <GO>
DRSK: Shimao Services
Source: DRSK <GO>
