China's dollar-bond default rate may set record high above 5.4%
China's cumulative 12-month offshore default rate may continue to trend higher to 5.4% in May, setting a record for a fourth month in a row, even assuming there's no default within the month. The rate could reach 6% if three of the 571 issuers miss interest or principal payments. Real estate may continue to see default rates deteriorate in the short term even though China's politburo discussed more anticipated policies to support the sector last week. We continue to believe the default rate will peak in 2H with the relaxation of restrictions on developers' cash holdings.
In the domestic market, chengtou issuers will continue to receive support for new issuance as China goes back to its traditional driver of economic growth, infrastructure investment, with the real-estate sector weakening.
April's record-breaking default rate
Source: Bloomberg Quant Platform (BQuant) , Bloomberg Intelligence
Monthly bond-default data show recent credit events were dominated by the real-estate sector, and we expect the trend to continue. As of April 30, we recorded $17 billion of offshore dollar-bond defaults and 35.5 billion yuan ($5.4 billion) of domestic bond defaults based on bond amounts outstanding in the last 12 months, involving 25 offshore dollar issuers and 11 domestic yuan issuers. In the dollar-bond market, defaulted bonds issued by 22 real-estate firms in the table comprise over 95% of all defaulted bonds.
Kaisa is the largest single defaulting issuer in the offshore market, based on bond amount outstanding, accounting for 24% of the total defaulted amount outstanding in the last 12 months. China Evergrande and its subsidiary Scenery Journey are the second-largest defaulting issuer.
Rolling 12-month defaults as of April 30
Source: Bloomberg SRCH <GO>, Bloomberg Intelligence
U.S. dollar issuer-based default distribution
Source: Bloomberg Quant Platform (BQuant)
Consent solicitations, tender offers and exchange offers by Chinese issuers continued to increase year-on-year during the last month along with the market default rate. Exchange offers became the major corporate action that issuers conducted. Expiring bonds were exchanged with new, longer-term securities, delaying immediate payment pressure on principal and interest. With issuers looking for remediation to ensure on-time future payments, consent solicitations and exchange offers may increase further.
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
China issuers ratings change by S&P
Entities experiencing rating changes
Source: Bloomberg Quant Platform (BQuant), Global Data
Chinese issuers face $157.4 billion maturities
China's corporate-bond markets, onshore and offshore combined, will have less refinancing risk arising from maturities and put options in May compared to April, which could potentially reduce market volatility. In May, 954 non-bank, non-financial issuers face a combined $157.4 billion of principal payments, equivalent to 3.1% of the market's amount outstanding. This is, however, still higher than the $136.2 billion (3.4%) of maturities in the same month last year. On a sector level, real-estate issuers have $19.4 billion of maturities in May, or 2.7% of the sector's total amount outstanding, down from 3.7% in April 2022.
Investors may need to pay closer attention to distressed issuers which are or were due to pay interest or principal in May, especially issuers that have proposed debt exchanges.
Chinese bond market debt maturity profile ($)
Source: Bloomberg DDIS <GO>, Bloomberg Intelligence
China VIE list on EQS <GO>
Chinese issuer VIE list
Source: Bloomberg EQS <GO>
