China property bond price plunge implies investor capitulation
China's median property bond price is 16 cents, vs. 40 cents in March, with about 80% of issuance trading below 50 cents, which may imply investors have given up on the sector and more selling could ensue. Housing non-completions have likely further dimmed recovery prospects, with completions prioritized over debt repayment to quell social unrest.
Offshore bondholders lower priority to homebuyers It's likely the central and local governments will financially assist developers, in whatever means necessary, to ensure the completion of housing projects to assuage angry homebuyers and quell growing social unrest. Yet it may also signal more resources will be devoted to this task, with creditor and bondholder repayments taking low priority, especially when it appears there is no quick legal debt-resolution mechanism for offshore bondholders, which seem disadvantaged in any potential recovery scenario.
Investors may have given up on calculating recovery rates of distressed China developers, as more than half the sector's bonds now trade at less than 20 cents. Several key institutional investors, such as BlackRock and UBS, have sharply reduced their position in the space.
Property bonds' distribution curve
Source: Bloomberg Intelligence
More bonds could move below 20 cents We calculate there is more than $1 trillion in the form of payables or debt which may be at risk of a haircut or restructuring. This amount doesn't include smaller developers which have defaulted nor private debt that has plagued some of the larger firms. The sizable default amount at risk, lack of aggressive policy by the central government to ease sector liquidity, and potentially more rating downgrades have further dampened investor sentiment, as evidenced by the current bond price distribution.
This may lead to further selling by bondholders, especially high-priced bonds. Bond prices of the last remaining IG-rated private developer, Longfor, have dropped below 60 cents, which makes any refinancing very difficult.
List of exchange offers/defaulted issuers
