PineBridge Sees China Dollar Bond Flood Hurting Developersby
‘Dynamics will drive the spread wider due to more supply:’ Lau
China builders sold $2.4 billion dollar junk notes in Q3
PineBridge Investments says a rally in dollar junk bonds sold by Chinese developers is about to fizzle as they return to the offshore market to raise funds.
Chinese builders issued $2.4 billion of high-yield U.S. currency notes in the third quarter, 63 percent more than the same period last year. The higher supply widened yield premiums over Treasuries on China’s dollar-denominated junk bonds by 30 basis points from a nine-year low on Oct. 10. PineBridge, which manages $81 billion of globally, is “very concerned about the current spread,” said Arthur Lau, co-head of emerging-market fixed income in Hong Kong.
As policy makers cracked down on funding of developers to curb runaway investment, 62 bankruptcies this year have come from the real estate industry, the biggest contributor to 493 restructurings in China. The Shanghai Stock Exchange has temporarily halted approving at least some property bond sales, people familiar with the matter said this week. Other developers have exhausted their quotas for onshore issuance after a two-year funding binge.
“We expect more dollar bonds to come from the Chinese property high-yield sector as we have seen in recent weeks because they have hit the limit in onshore issuance,” said Lau, adding that regulatory curbs in China would add to offshore supply pressure. “The dynamics will drive the spread wider due to more supply on the high-yield side.”
This has driven issuers to tap the overseas market. Yuzhou Properties Co., rated four levels below investment grade by Moody’s Investors Service, sold $250 million seven-year notes this week. Modern Land China Co., scored five steps below high grade, issued $350 million three-year debentures last week. The average spread on Chinese dollar junk bonds has widened to 503 basis points from 473 on Oct. 10.
China’s overheated property market steadied in September, as authorities stepped up home-buying curbs to avert a housing bubble. New-home prices, excluding government-subsidized housing, gained in 63 of the 70 cities the government tracks last month, down from 64 in August, the National Bureau of Statistics said Friday. Prices dropped in six cities, compared with four a month earlier. They were unchanged in one.
“Most of the supply will likely come from the lower-quality developers,” Lau said. “That’s why I am defensive on the high-yield side.”