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Stress Stays in China’s Property Debt Market as Evergrande, Firms’ Turnaround Plans

China’s junk dollar debt market is extending declines after the worst slump in five months, amid investor disappointment with long-awaited restructuring plans recently unveiled by defaulted developers.

A Bloomberg index of the country’s high-yield dollar notes, dominated by real estate firms, edged down in April after suffering its weakest month since October with a 3.7% loss in March. In contrast, high-grade counterparts gained 1.6% last month, part of a global rally.

As a result, stress in China’s broader offshore credit market eased to level 3 from 4 in February, according to Bloomberg’s China Credit Tracker. The gauge indicates rising levels of financial strain via a band from 1 to 6.

Many investors remain skeptical about the immediate benefits from a string of developments last month on debt restructurings at delinquent firms from China Evergrande Group to Sunac China Holdings Ltd.

The broader picture with the housing market remains mixed, leaving some doubts on builders’ ability to implement restructurings smoothly. The sector is showing some early signs of stabilization after the government increased support for cash-strapped developers, with home sales rising in recent data. But indicators of future construction have remained weak, with residential property investment continuing to decline.

“Recent debt restructuring proposals of distressed Chinese developers are mostly debt extensions rather than sustainable and permanent restructuring,” Fitch Ratings analysts including Samuel Hui wrote in a recent report. The viability of many developers and their ability to generate sufficient and sustainable free cash flow will remain in question, they added.

Evergrande, the epicenter of China’s unprecedented property debt crisis, still sees most of its dollar bonds trade below 10 cents, after it released a long-delayed proposal that offered new securities with maturities of up to 12 years or shares-linked notes. The plan, described by Nomura Holdings Inc. as setting a “low bar,” has renewed concerns about global investors’ long struggle to get their money back from Chinese defaulters.

Sunac, once among the nation’s top five developers, laid out details of a similar plan last month, under which offshore bondholders’ recovery looks “precarious,” according to CreditSights Inc. Most of the developer’s dollar notes remain deeply distressed at levels below 25 cents.

Meantime, more Chinese builders have shown strains, signaling that the latest recovery in home sales has yet to significantly ease the sector’s cash crunch.

Central China Real Estate Ltd., for example, warned earlier this month that it won’t be able to fully repay $897 million of dollar bonds maturing this year if investors don’t agree to a debt exchange.

“Many of the restructuring proposals are not really favorable for investors, but more like investors have to accept it,” said Kenny Chung, a Hong Kong-based portfolio manager at Astera Capital Partners. “The property market also shows slower recovery, signs which don’t give investors good incentive to add property positions.”

To be sure, others have flagged potential for investments.

Goldman Sachs Asset Management, for one, said it still sees opportunities for “strong returns” in Chinese property high-yield dollar notes as business prospects have improved and bond prices still average around 50 cents on the dollar.

Tracking Payment Troubles

Monthly bond maturities for Chinese firms that face debt-repayment tests

And for China’s local credit market, it’s continued to recuperate from an abrupt selloff late last year induced by optimism about a reopening economy, with Bloomberg’s tracker showing stress there unchanged at level 3 last month.

The risk premium on five-year top-rated onshore corporate bonds over corresponding government debt has fallen to the lowest since November.

Provincial Breakdown

Local note delinquencies remain unchanged at 3 billion yuan

Note: Map shows mainland China’s onshore bond market. Source: Bloomberg

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