Credit risk analysis

Defaults may drop in the near term
China's issuer-based default rates may drop in November, when principal maturity will fall in both domestic and offshore dollar markets. While a systematic default is unlikely to happen in China's bond market, single-name-driven idiosyncratic risk remains.

China's October and November default rates will hinge on Evergrande's resolution of its dollar-bond interest payment within the 30-day grace period ending Oct. 23. Offshore high yield's default rate based on amount outstanding could rise to about 9% if Evergrande fails to make payment, as we previously highlighted. Yet issuer-based default rates will barely move, given the risk is contained within the single-name level. Overall, Chinese real estate companies have little evidence of fundamental-driven systemic issues. It's unlikely to see systematic default coming in the near term, but single-name-driven credit risk may spur market price volatility. Portfolio diversification is key to avoid idiosyncratic risk. We hold to our view that market-level spread may reverse from such mispricing.

USD default rates at 2.1% in October

Source: Bloomberg Quant Platform (BQuant), Bloomberg Intelligence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly bond-default data shows recent credit events in October were entirely driven by the real estate sector's dollar bond issuance. During Oct. 1-29, we recorded $926 million offshore dollar bond defaults based on bond amount outstanding, including four offshore dollar bond issuers. This is lower than September, including $1 billion offshore bond and 1.5 billion yuan ($235 million) domestic bond defaults.

Actual bond defaults (Oct. 1-29, 2021)

Source: SRCH <GO>, Bloomberg Intelligence

By sector, real estate continues to dominate U.S. dollar issuer-based bond defaults (64%), while technology, utilities, healthcare and consumer discretionary comprise the remainder.

USD issuer-based default distribution by sector

Source: Bloomberg Quant Platform (BQuant), Bloomberg Intelligence

 

 

 

 

 

 

 

 

 

Debt Maturity

CDS spreads widen, credit ratings downgrades

Chinese issuers' 5Y CDS spread widened a lot in the past one month, especially in real estate. Agile's 5Y CDS valuation moved up by 457bps. The CDS spreads of Shimao Group and Road King Infrastructure also widened by 157bps and 115bps. WCDS <GO> is a comprehensive market surveillance tool that provides transparency into the credit default swap (CDS) market.

5Y CDS spread of Agile, Road King and Shimao

Source: WCDS <GO>

According to Bloomberg-compiled data, Chinese entities experiencing downgrades by local agencies peaked in June, followed by an increase in downgrades from international agencies since July.

Number of entities experiencing rating changes

Source: Bloomberg Quant Platform (BQuant), Global Data

Debt maturity
China's domestic bond market faces 568 billion yuan in maturities, with $1.3 billion for dollar offshore.

Chinese domestic corporate bond market may see less refinancing risk arising from upcoming maturity. In November, 420 non-bank, non-financial issuers in the onshore market will face a total of 568 billion yuan debt principal payment, equivalent to 2.7% of the total market amount outstanding (AO). This is a significant improvement compared to the 729 billion yuan (3.7% of market AO) in the same period last year, and will happen across nearly all sectors except health care. In particular, real-estate issuers have 62 billion yuan maturities or 1.95% of sector AO, down from 2.3% in November 2020.

Maturity distribution in China's offshore bond market in November will improve compared to the same month last year, which means there should be less refinancing risk, pointing to lower market volatility. In November, 24 offshore issuers will face $7 billion of maturity, equivalent to 1.2% of the market AO. This is down from $9.2 billion or 1.7% of market AO in November 2020. Investment grade and non-rated issuers have $3.8 billion and $3.7 billion of maturity, respectively. High-yield issuers' debt distribution will significantly improve in November, with only $1.3 billion (0.7% of high-yield outstanding) outstanding principal payment.

Chinese bond market debt maturity profile (in Dollars)

Source: DDIS <GO>, Bloomberg Intelligence