China issuer default rate data series shows sectoral differences

The default rate among China's property issuers remained lower than the market-level, despite recent delinquencies.

This analysis is by Bloomberg Intelligence Associate Analyst Jason Lee and Credit Strategist Timothy Wee Lee Tan. It appeared first on the Bloomberg Terminal.

BI has launched new proprietary data series highlighting issuer default rates for China onshore and offshore debt markets. This may allow investors delve deeper into sectoral differentiations in terms of stress, providing more input for portfolio allocations.

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While amount outstanding default rate may be better for working out portfolio structure, issuer default rate may give a better idea on whether a financial system or industry is trending towards a systemic risk event. Rising issuer default rates may be driven by macro factors. By looking at sectoral breakdown in this data series, investors may glean insights into whether financial stress is rising in any industry and tie in macro indicators to assess potential problems and opportunities.

A trending divergence between the amount outstanding and issuer default rate may also indicate deteriorating risk dispersion. Eg. if issuer default rates rise relatively faster vs amount outstanding default rates, it may imply smaller entities are facing liquidity issues. Granular sector analysis will yield greater insights.

China Issuer Default Rate by sector

Source: Bloomberg Intelligence

 

Property issuers default rates remain lower than market

China's property issuers maintained a low default rate among their peers from other sectors in the USD-denominated market, based BI's most recent data. Idiosyncratic-driven default events, including China Fortune Land Development (CHFOTN) and Tianjin Real Estate Group (TJREDM), have spurred the market's attention on China corporates' delinquencies. However, our calculations based on Bloomberg's Quant platform (BQuant) indicated that the issuer-based default rate of USD-denominated bonds in China's property issuers remains safe at 2.03% in March 2021. This is 0.87 percent points lower than the market-level of 2.90%.

The four property developers included in the March 2021 default rate calculation are Tahoe Group (THHTGP), China Fortune Land Development (CHFOTN), Yida China (YIDCHL), and Tianjin Real Estate Group (TJREDM).

Property vs. Market Default Rates

Source: Bloomberg Intelligence

New China Issuer based Default Rate series

Bloomberg Intelligence has created a new proprietary data series tracking the 12-month rolling credit default rate based on the number of issuers rather than on the amount outstanding for both onshore and offshore markets. This series is more aligned with how rating agencies track credit defaults globally and would be able to provide an insight into the trend of Chinese institutional defaults and also, in combination with the default rate by amount outstanding, on the composition of the defaulted pool.

The criteria is similar to the default rate based of amount outstanding. The series calculates the default rates based on the number of issuers that have defaulted against the number of issuers at the beginning of a period, which in this case is one year.

China historical Issuer Default Rate

Source: Bloomberg Intelligence

Default rate methodology

We calculated China's default rate by dividing the amount of defaulted bonds to the outstanding amount of bonds by Chinese issuers. Corporate bonds are considered by Bloomberg Data to be in default in these circumstances: when the clearing house or exchange where the bond is traded disclose a bond default, when the issuer misses payment of a coupon and/or principal, when issuers breach certain covenants such as cross-default covenants, file for bankruptcy, or are unable to fund early redemption by bond holders. Bloomberg uses these standardized rules to monitor and capture events when corporate bonds default.

The SRCH <GO> criteria used is available in the Data link below our exhibit.

China Defaulted Bond by sector (2020)

Source: Bloomberg Intelligence