Private Banks Sell Debt in Worst Quarter Since ’11: China CreditRachel Evans and David Yong
Chinese high-yield dollar-denominated bonds are returning the least in more than a year as private banks react to a flood of debt supply and rising global interest rates by cutting holdings.
Investors have gained 2.24 percent from the notes since Dec. 31, poised for the worst quarter since the three months ended September 2011, according to Bank of America Merrill Lynch indexes. Globally, junk bonds have returned 2.47 percent, the data show. Coutts & Co. is advising clients to shift into stocks and trim corporate debt holdings.
China’s dollar bond rally started to falter in January as mainland and Hong Kong borrowers sold almost seven times more undated or unrated debt than a month earlier. Demand has also dropped as the benchmark 10-year Treasury yield rose to an 11-month high, China announced a crackdown on borrowing for property investment and a solar panel maker sought a delay in repaying its overseas debt.
“There are some indigestion problems from large new issuances and Chinese tightening measures,” said Ryan Tsai, senior investment strategist for greater China at Coutts. “Last year, a lot of our clients were heavily overweight on credits. Our caution now basically means we are urging them to have a more balanced portfolio.”
Hong Kong-based Tsai sees bonds falling one to two cents on the dollar in “profit-taking” rather than a “major correction” of more than 5 cents. Coutts manages 28.9 billion pounds ($43.8 billion) as the private banking arm of Royal Bank of Scotland Group Plc.
Asian corporate high-yield notes are vulnerable to falling appetite among private banks, which now hold 30 percent of the securities, according to Barclays Plc estimates. Compounding the risks, institutional investors are avoiding some unrated issuers such as those that leverage their brand names to raise funds, according to AllianceBernstein Hong Kong Ltd.
“Private banks, who had been the big buyers, during February found a level where supply finally met demand,” according to Hayden Briscoe, a director in the Asia-Pacific fixed income team at the asset manager. “People were then exiting on concerns that interest rates in the U.S. will rise.”
Climbing interest rates in the U.S. have burnished the appeal of safe-haven Treasuries compared with riskier assets. Yields on the benchmark 10-year U.S. notes reached 2.08 percent on March 8, the highest since April last year. Emerging market funds in hard currencies, such as dollars, were “struggling” to attract cash in the week ending March 13, according to EPFR Global.
More than a quarter of the record $18.9 billion of all notes sold by Chinese and Hong Kong companies this year was unrated and 82 percent of this debt lost money as of March 18, data compiled by Bloomberg show.
Ungraded notes sold by Cheung Kong Holdings Ltd., Agile Property Holdings Ltd. and Champion Real Estate Investment Trust are the three worst-performing new issues this year. Private banks bought 60 percent of the ungraded securities sold by Cheung Kong, the worst performer. The developer is controlled by Asia’s richest man Li Ka-shing.
The proportion of unrated issuance by Chinese and Hong Kong borrowers has risen to 25 percent this year, amid the record overall sales, from less than 20 percent last year, according to data compiled by Bloomberg.
Excessive supply was the main cause of the relatively weak performance of Chinese dollar notes as real-estate controls dragged down sentiment, according to Luc Froehlich, a fixed-income director at Manulife Asset Management Asia. The slump was compounded by “the lower quality of some issuers, as well as the weaker structure of some deals such as the perpetual bonds that targeted private bank clients,” he said.
The Chinese authorities this month ordered stricter enforcement of taxes on house sales, along with higher down payments and interest rates for second-home mortgages in cities with “excessively fast” price gains. New home prices posted the broadest advance since December 2011 last month, a test for new Premier Li Keqiang as he seeks to prevent a bubble without slowing growth. China’s economy is likely to expand 8.1 percent this year, according to the median estimate of 46 analysts surveyed by Bloomberg.
The earnings of most rated corporates are on track to recover from 2012 lows, supported in part by a rebound in the domestic economy, according to a report from Moody’s Investors Service dated March 18. Investment in public infrastructure and stabilization in the property market should boost growth, the report said.
“We invest in the safer, bigger property companies where we have overweight ratings, but we’re underweight on the risky ones,” Hans Stoter, who helps oversee about 183 billion euros ($236 billion) of fixed-income assets as chief investment officer at ING Investment Management Co., said in an interview in Taipei this week.
Eight Chinese banks filed a petition for insolvency and restructuring of the main manufacturing unit of Suntech Power Holdings Co., once the world’s top solar maker. The company said it won’t object to the filing in Wuxi Municipal Intermediate People’s Court. Suntech received a notice of default from the trustee administering its convertible bonds, which matured March 15, according to a statement on March 18. It said March 11 that about 60 percent of bondholders had agreed to wait until May 15 before exercising their rights.
“We don’t see a systemic kind of defaults, it’s more centered on specific issuers and the new-energy sector hasn’t been performing well and the government doesn’t seem to have an unlimited support for that sector,” Coutts’ Tsai said.
Rated debt from developers Kaisa Group Holdings Ltd., Country Garden Holdings Co. and Central China Real Estate Ltd. was trading at more than 102 cents on the dollar, up from par, as of March 18, Bloomberg prices show. While all bonds sold in January lost money as of Feb. 5, 38 percent of notes sold this year are now above their issue price, data compiled by Bloomberg show.
The cost of insuring China’s debt against non-payment with credit-default swaps is little changed this year at 67 basis points from 66 on Dec. 31, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The yuan slipped 0.02 percent to 6.2133 per dollar as of 9:54 a.m. in Shanghai, prices from China Foreign Exchange Trade System show. It touched 6.2113 yesterday, the strongest level since the government unified the official and market rates at the end of 1993.
Yields on China’s benchmark 10-year government bonds are unchanged this year at 3.58 percent. The yields on similar-maturity top-rated corporate bonds have fallen 12 basis points to 5.17 percent, narrowing the spread to 159.
Even as their bond performance slumps, Chinese borrowers are testing the waters for further issuance. China Minzhong Food Corp. scheduled investor meetings for this week to discuss a planned sale of dollar-denominated notes, according to a statement to the Singapore stock exchange dated March 18. Tianneng Power International Ltd. is also looking to sell rated dollar securities, a person with knowledge of the matter said March 19.
While investors remain prepared to buy even lower-rated notes as long as the securities compensate fairly for the risk, they’ve become more cautious with structures that lack set maturity dates and other assurances, according to Mark Reade, a Hong Kong-based credit desk analyst at Credit Agricole CIB.
“Investors are shying away from weak structures, which accounts for the performance of Cheung Kong and Agile’s perpetuals, as well as lesser-known credits such as Champion,” he said.