Bankers say China’s debt burden weighs on high productivity problems in Asia in the first half of 2022

Chinese flag seen in Beijing
FILE PHOTO: The Chinese national flag is seen in Beijing, China April 29, 2020. REUTERS / Thomas Peter

December 20, 2021

By Scott Murdoch

HONG KONG (Reuters) – Debt turmoil in China’s property sector is set to mask high-yield corporate bond deals in Asia in the first half of next year after a spate of cases. Property firms’ defaults have prompted global investors to cover their wounds, bankers say.

Chinese property developers account for the largest share of high-yield deals, also known as junk bonds, in the region.

The volume of such issues has been severely reduced by concerns about the financial health of Chinese developers, with the issuance of high-yield corporate bonds in the Asia-Pacific region in 2021 falls to a three-year low.

China Evergrande Group and Kaisa Group have both missed bond payments this year.

Failure to make payments, followed by a series of credit downgrades from indebted developers, has increased China’s high-yield debt, fueled cash flows and caused Asset managers worry about regional issuers.

Across the Asia-Pacific region, $50.4 billion in high-yield corporate bonds have been issued this year, the lowest since 2018 compared with $63.9 billion in 2020. according to data from Refinitiv. For higher credit grades across the region, a strong start to the year means credit volumes for 2021 will be higher than the previous year.

China was the cause of the decline in the region, as investors started closing their books early to avoid the impact and impact of the sell-off in the real estate sector in the last quarter.

“It’s a reasonably short list of names that could reopen the high-margin market,” said Ernst Grabowski, head of Asia Pacific debt at Morgan Stanley.

“It would have to be a company where most investors feel that it is relatively safe as a credit proposal and where they judge there is enough support from other investors and where they think liquidity will be good.”

Refinitiv data shows that new high-yield deals out of China in both the dollar and the yuan fell to $3.2 billion last quarter from $9.7 billion in the third quarter.

The first sale to break a freeze in high yields will need to come from a stronger company to give investors confidence that the new issue can open up the market, the advisers said. other issuers.

“I think there will probably be new releases from the (China) property sector in the first half of the year, maybe even the first quarter,” said Avinash Thakur, head of Asia Pacific at Barclays. .

“Debt investors are more focused on the leverage levels of Chinese companies but in a way they feel that the correction that is happening now is overdue.”

A new issuance will yield significantly higher interest rates to companies than previous deals in 2020 amid market turmoil, bankers said, which will boost demand. from investors.

“Investors will realize that there is still good credit in Asia and when there is no activity, a lot of investors are hoarding,” said Philip Lee, a partner at law firm DLA Piper. cash to deploy”.

However, it could take another six months for the market to open, he said.

(Reporting by Scott Murdoch; Editing by Sumeet Chatterjee and Ana Nicolaci da Costa) Bankers say China’s debt burden weighs on high productivity problems in Asia in the first half of 2022

Bobby Allyn

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