China's default rate may rise to new record after breaking 6%
China's offshore trailing 12-month default rate may rise further to 6.5% from the current 6.2% if two of the 589 issuers miss an interest or principal payment in August, in our scenario. In the last 12 months, 27 issuers that hadn't been in debt trouble in the past defaulted and we assume this trend will continue. According to a list compiled by Bloomberg News, there are at least 12 issuers facing debt-payment tests this month, including KWG, Logan and Greenland. Our worst-case scenario assumes all 12 default in August, which we believe is unlikely.
BI default rate
Source: Bloomberg Quant Platform (BQuant) , Bloomberg Intelligence
Monthly bond-default data showed recent credit events were dominated by the real-estate sector, and we expect this to continue. As of July 31, the trailing 12-month default volume marked $27.3 billion for dollar-bond defaults and 19.6 billion yuan ($2.9 billion) of domestic bond defaults, based on bond amounts outstanding, involving 36 offshore dollar issuers and 9 domestic yuan issuers. In the dollar-bond market, defaulted bonds issued by 32 real estate firms in the table were over 96% of all defaulted bonds.
Kaisa was the largest defaulting issuer in the offshore market, accounting for 15% of the total defaulted amount outstanding in the last 12 months. Yuzhou Group overtook China Evergrande to become the second-largest issuer by defaulted amount outstanding.
Rolling 12-month defaults as of July 31
Source: Bloomberg SRCH <GO>, Bloomberg Intelligence
U.S. dollar issuer-based default distribution
Source: Bloomberg Quant Platform (BQuant)
The consent solicitations, tender offers, and exchange offers by Chinese issuers continued to rise on a yearly basis. Over the past year, the debt purchase shrank while consent solicitations and exchange offers grew. With the increasing default rate, consent solicitations and exchange offers are expected to keep growing over the coming months.
CACT<GO> keeps you updated on all the corporate actions.
Corporate actions by Chinese issuers
Source: Bloomberg CACT <GO>, Global Data
Credit rating change: 52 Chinese issuers were downgraded in July
According to Bloomberg-compiled data, Chinese entities experiencing downgrades by local agencies peaked in September 2021, followed by a peak in downgrades by international agencies in October.
Rating change: Beijing Capital Land
Source: Bloomberg RATC <GO>
Entities experiencing rating changes
Source: Bloomberg Quant Platform (BQuant), Global Data
Dollar-bond maturity shrinks to $4.9 billion
Refinancing risk arising from maturities in China's corporate-bond markets will fall in August compared with previous months, potentially reducing market volatility. 23 non-bank, non-financial issuers face a combined $4.9 billion of principal payments in August, equivalent to only 0.9% of the amount outstanding in the market. This is notably lower than the $7.1 billion (1.2%) of maturities in the same month last year. On a sector level, real-estate issuers have $3.3 billion of maturities in August, or 1.7% of the sector's total amount outstanding.
Investors may need to pay closer attention to distressed issuers which are or were due to pay interest or principal in July, especially issuers that have proposed debt exchanges.
Chinese bond market debt maturity profile ($)
Source: Bloomberg DDIS <GO>, Bloomberg Intelligence
