Dozens of Chinese property companies have defaulted on their bonds over the last two years, but only a handful have paid investors back any money. BLOOMBERG NEWS
By
Frances Yoon
and
Rebecca Feng
Updated Oct. 17, 2023 12:06 am ET
China’s property market meltdown created a multibillion-dollar opportunity for distressed-debt investors. It hasn’t paid off.
The country’s real-estate sector is reeling from a yearslong slowdown that has put strains on the economy, sparked widespread protests and triggered defaults on around $81 billion of Chinese developers’ international bonds between 2021 and 2022, according to figures from S&P Global Ratings.
The wave of defaults in the sector proved irresistible to many distressed-debt funds. These funds buy the bonds or loans of struggling companies, often at a price well below face value, and negotiate with the companies to work out a debt restructuring plan. They flooded into the market two years ago, including buying many of the outstanding bonds of developers
But the distressed-debt playbook isn’t working in China.
Dozens of Chinese property companies have defaulted on their bonds over the last two years, but only a handful have paid investors back any money. Last month, Evergrande
abandoned a $35 billion debt restructuring plan that it had finally agreed with some of its investors after protracted negotiations. China Aoyuan still hasn’t completed a deal more than 18 months after it defaulted.
Most dollar bonds sold by Chinese property companies are trading below 10 cents on the dollar, and several are trading at less than 5 cents, according to research firm CreditSights.
“The market is showing all the signs that it’s lost patience,” said Jean-Charles Sambor, head of emerging markets fixed income at BNP Asset Management. “When you see these bonds now trading below 10 cents on the dollar, it tells you that investors expect a very low recovery, or total liquidation in some cases.”
Investors holding defaulted bonds have historically got back more than 30 cents on the dollar, according to global figures from Moody’s Investors Service, a credit ratings company.
An aerial photo shows a residential area of Evergrande in Nanjing, East China’s Jiangsu province. PHOTO: CFOTO/ZUMA PRESS
Investment firms including Vontobel Asset Management in Zurich, SC Lowy in Hong Kong and New York-based
Apollo
Global Management
bought Evergrande’s bonds in late 2021. At the time, one of its most actively traded bonds was worth around 20 cents on the dollar. The same bond is now trading at around 2.5 cents on the dollar.
Vontobel has closed its position in Evergrande, said a spokesperson. SC Lowy sold most of the Chinese property bonds it held last year, according to Michel Lowy, its co-founder and chief executive. Apollo didn’t respond to a request for comment.
A prolonged slowdown in the property sector is making it difficult for companies to estimate the cash flows they will need to pay investors back in the future. In September, sales at China’s 100 largest developers were down almost 30% from last year, according to data provider China Real Estate Information Corp.
A worker stands outside the construction site of an office building owned by Aoyuan Group in Hong Kong. PHOTO: LAM YIK/REUTERS
Shimao Group, a Shanghai-based developer, recently changed the terms of a planned debt restructuring, asking investors to accept a lower recovery rate because of the weak property market, according to a person familiar with the matter. Last week, the company said its contracted sales fell three-quarters in September from the same month last year.
“Given the uncertainty and state of the property sales, I’m not sure anyone can figure out what a sustainable business model looks like, which is why it’s taking so long,” said Diwakar Vijayvergia, a portfolio manager at
AllianceBernstein
. “It’s going to be a time-consuming process.”
Distressed-debt investors are also finding negotiations complicated by China’s government, which is attempting to avoid further economic damage from the property market slump. The country’s
economy has struggled this year. Exports are down, consumer demand is sluggish, and inflation is nonexistent.
European and U.S. distressed-debt investors who bought Evergrande’s bonds after the company defaulted were hoping for a “rational, market-driven” restructuring, said Kenny Chung, portfolio manager of fixed-income focused hedge fund Astera Capital.
“Now they’ve realized that the restructuring of a company that is the scale of Evergrande will be overseen by the government and will depend on the government’s future design for the firm,” Chung said.
Residential buildings under construction at the Honor of China project, originally developed by defaulted Shimao Group. PHOTO: BLOOMBERG NEWS
Sunac China
, a large developer that defaulted last May, received court approval for a restructuring plan it wants to complete this month, and investors point to it as an example that deals are possible. Sunac’s dollar bonds have risen several points in the past weeks, although they are still trading at around 15 cents on the dollar, according to Tradeweb.
Robert Koenigsberger, founder and chief investment officer of Gramercy Funds Management, said that distressed-debt investing can still work in China’s property sector. He said that after the wave of defaults in 2021, many investors rushed into the sector too soon—and paid too much.
“They made the first classic mistake in distressed investing: They bought it because it was cheaper than it used to be, not cheap relative to what it was worth. You have to get involved in the sweet spot from both a timing and entry price perspective,” said Koenigsberger, whose fund manages almost $6 billion of assets.
