HONG KONG Reuters - As uncertainty looms over the cash-strapped China Evergrande Group, who is seizing up China's junk bond market, pressure is building on its peers to access fresh funding to repay notes worth nearly $300 billion due over the next two years.
Once its Top Developer, Evergrande now looms as one of China's largest ever restructurings as a crackdown on debt ends a freewheeling era of building with borrowed money that became infamous for ghost cities and roads to nowhere.
Evergrande will default on a dollar bond if it fails to pay interest due within 30 days of Thursday, and the risk is that a messy liquidation drags down the entire property sector, which accounts for a quarter of the country's gross domestic product. L 1 N 2 QP 048 The nervousness has resulted in a handful of Chinese real estate developers receiving ratings downgraded by agencies as concern swirls about their debt and repayment ability, which, in turn, will weigh on their borrowing costs.
Debt banks said few companies were interested in tapping the market for fresh borrowings at the moment, as Evergrande's fate remained unclear and that any who would attempt the market would likely have to pay up.
Debt is being re-priced and some developers may be shut out, tells Reuters Michel Lowy, CEO of asset management group SC Lowy. He noted the whole sector; not just investors, but surely more cautious about which developers to invest in. The Global investors have been on tenterhooks as China's debt payment obligations of Evergrande, labouring under a $305 billion mountain of debt, triggered fears its malaise could pose systemic risks to the financial system in China.
The foreign property investors usually yield between 4% and 12%, if not higher, depending on their credit ratings and strength of their balance sheet and recent modest deals have been at the upper end of that range.
Redsun Properties Group Ltd, for example, that raised $210 million in May with a coupon of 7.3%, issued a $200m bond on Monday at a coupon of 9.5%.
An index of high-yield Chinese debt has been tanking for months - even as global credits rallied - as concerns at Evergrande's predicament have seenpened across the market.
An estimated $32 billion worth of the bonds issued by Chinese developers are due to be refinanced by 2021, according to Dealogic data, before major transactions expire in 2022.
Nearly $125 billion worth of developer debt led by Dealogic for 5 of the top ten biggest maturations worth nearly $6.3 billion, the Evergrande figures showed. A further $140.7 billion will mature in 2023.
The figures include onshore and offshore bond issued by Chinese developers in dollars and yuan.
If we were to see a deal this week, the major response would be 'well, there needs to be a premium', said a Hong Kong-based debt banker who could not be named as he was not authorised to speak to media.
No one has paid an Evergrande premium yet in the past few weeks but will they be paying that premium by the end of this year? How long does this last? China's markets opened after holidays on Wednesday, but were quiet in the lead up to what is usually a busy period in October when firms finished their quarterly balance sheets and tend to look to tap markets.
Some Chinese property developers have started asset sales and started looking for alternative funding sources, in one case shareholders, as broad spreads add to regulatory difficulties in accessing capital.
Guangzhou R&F Properties Co, which according to Fitch has $1.9 billion in debt maturing within 12 months, has already turned elsewhere - raising as much as $2.5 billion by selling a subsidiary and taking loans from its biggest shareholders.
Others are slowing, with shares in the Sinic Holdings Group cratering almost 90% before being suspended from trading on Monday, following Fitch outlook downgrade followed by a ratings cut to CCC by S&P on Tuesday.
Sinic has failed to provide a clear repayment plan, S&P Global Ratings says.
Redsun and R&F declined to comment on Thursday, and Sinic didn't immediately respond to a request for comments.
If a Chinese developer becomes close to the property market, the door will close and in which investor is looking to raise money or refinance debt, Jonathan Leitch, Hogan Lovells partner, said Reuters.
There might be a small premium attached for some issuers, but there is so much liquidity in global markets that money will find its way to these firms.