Evergrande Debt Setback Drags China Developers to Five-Month Low

2022-08-01 09:37:08.171 GMT

By John Cheng and Dorothy Ma

(Bloomberg) -- A worsening crisis in China’s real estate sector is dragging industry shares to the lowest in almost five months, with home sales slumping further and new setbacks spreading at the nation’s most indebted developer.

A Bloomberg Intelligence index of developer stocks dropped as much as 2.3% to the lowest level since March 16, before
paring. Guangzhou R&F Properties Co. and Country Garden Holdings Co. led the declines, each losing about 4%. 

The industry’s outlook turned darker after data showed home sales extended a plunge amid a widening mortgage boycott, while China Evergrande Group failed to unveil a preliminary restructuring plan by the end of July as it had long promised.

Investor mood also soured on signs that Beijing is prioritizing the completion of homes for social stability over developers’ financial health.

“There are no signs that China will provide stronger policy support in terms of refinancing,” said Daniel Fan, a Bloomberg Intelligence analyst. “The policy of prioritizing home delivery would help market sentiment only if the measures result in a rebound in contracted sales. But at this moment the sales are still choppy.”

China’s junk dollar bonds, dominated by notes of developers, were little changed Monday morning, according to credit traders. Total returns for these notes fell 7.9% in July, the biggest loss since February and a record-extending 11th- straight drop, according to a Bloomberg index. 

The latest weakness in developer stocks followed fresh signs of trouble in China’s property sector and its broader economy. Combined contract sales by the country’s top 100 developers fell 39.7% on year in July, according to preliminary data compiled by China Real Estate Information Corp. Factory activity in the world’s No. 2 economy also unexpectedly contracted last month, highlighting the fragility of a recovery amid sporadic Covid outbreaks.

Also weighing on investor mood is news that China is considering a plan to seize undeveloped land from distressed real estate companies and use it to help finance the completion of stalled housing projects. While the initiative would help appease angry buyers of unfinished homes, it may potentially remove a key source of assets for creditors seeking to limit losses during a debt restructuring. 

In a development that indicates the limits of Beijing’s capacity to help distressed builders, a private developer that received a state bailout in May had to extend maturities on all its remaining $1.57 billion of dollar bonds by 20 months. 

Meantime, government-backed Sino-Ocean Group Holding Ltd.’s credit rating was cut into junk territory by Moody’s Investors Service, a move that reflects expectations that support from the developer’s top state shareholder will reduce over time. 

Also disappointing investors was Evergrande’s apparent setback in its closely watched restructuring exercise. The
developer at the epicenter of the industry’s debt crisis missed a self-imposed deadline to deliver a ‘preliminary restructuring plan’ by the end of last month and instead pledged to announce a specific one within 2022.  

Evergrande also said separately that a unit will need to sell shares in a regional bank after losing an arbitration ruling. 

“Generally, the delay in announcing a detailed plan is disappointing, though unfortunately investors have few options other than to wait,” said Shu Hui Woon, credit analyst at Lucror Analytics. “There could be more winding-up petitions if
Evergrande drags the process further.” 

The unit’s stake sale in Shengjing Bank Co., a local lender in northeastern China, may prompt more onshore creditors to protect their interests, Woon said. 

--With assistance from Yuling Yang.