Real Estate

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It was good while it lasted. For the past 18 months, Chinese developers have been issuing bonds at home like never before. As a result, they slowed their reliance on foreign investors, who cheered as their now-scarcer offshore debt rose in value even amid an increase in leverage.

They should be worried now after a local note sale flunked and property companies start to return cap in hand.

Upward Gradient
The price of bonds in an offshore high-yield index from China, comprised mostly of developers, has been rising
Sources: Bloomberg; BofA Merrill Lynch Indexes

On Friday, Dalian Wanda Commercial Properties, the developer controlled by billionaire Wang Jianlin, canceled a 6 billion yuan ($927 million) bond offering, adding to at least 42 Chinese companies that have postponed or scrapped note sales this month through April 15.

On Monday, China Aoyuan Property raised $250 million selling three-year debentures offshore. It's the seventh developer to sell securities outside of China this year and the third this month.

Back From Limbo
After a lull, three Chinese developers offered bonds to foreign investors this month
Source: Bloomberg

Others could follow, considering the yield on corporate notes in China has increased for nine out of the past 10 trading days, helping to trigger the biggest selloff in onshore junk debt since 2014.

The domestic market isn't entirely shut, but if the risk aversion continues, international bondholders will be faced with an ugly reality. Not only are the companies they invested in more in debt than ever before, but other, onshore creditors now rank higher in the pecking order.

Gearing Up
Leverage of Chinese developers with dollar bonds outstanding has almost doubled since 2011
Source: Bloomberg
* Figures are based on developers included in the BofA Merrill Lynch Emerging Markets Corporate Plus China Issuers Index.

To some, this shift hasn't gone unnoticed. Standard & Poor's has made 21 negative ratings moves on Chinese developers in the past year, including a downgrade of Dalian Wanda to BBB in February. Moody's, meanwhile, lowered Evergrande Real Estate Group's bonds to B3 at the start of the year while S&P has them at CCC+. The developer, which some analysts say has become too big to fail, raised $700 million selling U.S. currency bonds in January.

Foreign investors, however, have been mostly complacent, counting on companies being able to use yuan to repay dollar debt. As the tide turns, they should have a serious rethink.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net