Fed Flags China Concerns as Deadline Looms: Evergrande Update

(Bloomberg) -- The Federal Reserve warned that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorated dramatically, as investor focus turns to China Evergrande Group’s next bond payment deadlines. 

The Fed’s stability report, which is meant to highlight risks that could undermine the financial system, said that “financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.”

China investment-grade and junk-rated dollar bonds continued to struggle Tuesday morning, as developers’ debt extended recent weakness. The high-yield market had dropped 12 of the last 13 trading days through Monday, according to a Bloomberg index, putting yields at 23.5%. Even state-owned firms are feeling the effects of the deepening rout. 

A 30-day grace period on some Evergrande coupon payments is set to end on Wednesday. While the developer has paid other overdue coupons at the tail-end of the grace period, its dollar notes remain at distressed levels. Creditors are bracing for an eventual debt restructuring that could rank among the largest ever in China.

Meanwhile, holders of dollar notes sold by Evergrande unit Scenery Journey Ltd. had yet to receive payment for coupons that were officially due Saturday. The unit had two dollar bond coupons due Nov. 6: $41.9 million on a 13% note and $40.6 million on a 13.75% bond.

Market participants were also on high alert to the risk of more policy change as the Communist Party kicks off a major convention this week.

Key Developments:

China Dollar Bonds Extend Declines as Real Estate Notes Slide (10:11 a.m. HK)

China investment-grade and junk-rated dollar bonds continued to struggle Tuesday morning, as developers’ debt extended recent weakness. Junk notes fell as much as 2 cents on the dollar, according to credit traders, on pace for the largest decline in four weeks.

China’s Euro Bond Return Seen Thriving Even With Property Crisis (9:42 a.m. HK)

China’s mounting property crisis isn’t expected to be a deterrent to investors vying for a slice of the sovereign’s rare euro debt.

China is set to open books on 4 billion euros ($4.63 billion) of new bonds across three tranches on Wednesday, according to a statement. The sale will be its first in Europe’s common currency since last November and comes weeks after Evergrande narrowly avoided default.

HKMA Asks Banks to Report China Property Exposure, HKEJ Says (8:04 a.m. HK)

The Hong Kong Monetary Authority told banks recently that it would require them to disclose more details about their exposure to the Chinese real estate sector, the Hong Kong Economic Journal reported, citing unidentified people.

China Cities Tighten Use of Pre-Sale Property Proceeds (7:53 a.m. HK)

A growing number of cities in China have tightened supervision over the use of proceeds from pre-sale of apartments, according to a report by China Business News Tuesday.

Major cities including Beijing, Tianjin, Shijiazhuang as well as smaller municipalities like Suzhou and Nantong in the eastern province of Jiangsu, and Luohe in central Henan province have issued rules tightening oversight of the proceeds.

Goldman Snaps Up China Property Debt as Others Back Away (6 a.m. HK)

Goldman Sachs Asset Management is buying Chinese real estate debt -- even as other investors shy away. 

The firm has been adding a “modest amount of risk” through high-yield bonds issued by China property developers and denominated in U.S. dollars, said Angus Bell, a member of Goldman’s portfolio management team. The market is overestimating the contagion risk, Bell said in an interview Friday. 

Kaisa to Cancel Investor Representatives Meeting on Wednesday (11:18 p.m. HK) 

Kaisa will cancel a meeting with investor representatives on Wednesday, citing public safety concerns due to the pandemic, according to a statement posted on its WeChat page late Monday. The company said its “total assets are worth more than its liabilities,” adding that it has enough assets for the redemption of wealth management products. 

“Kaisa’s cancellation of its meeting with wealth management product investors may indicate it needs more time to find funds to repay them,” said Bloomberg Intelligence credit analyst Daniel Fan. 

Evergrande Sells HengTen Networks Shares (5:15 p.m. HK) 

China Evergrande Group sold 200 million HengTen Networks shares Nov. 8 at an average of HK$2.0365 each, according to a filing. The sale, which reduced Evergrande’s stake to 20.82% from 22.98%, raised about HK$407.3 million ($52.3 million), according to Bloomberg calculations.

Government-Held Developer Latest to Plunge (2:40 p.m. HK)

In a sign that not even state-owned firms are safe from the deepening rout in Chinese developer bonds, Sino Ocean Group Holding Ltd., part-owned by the finance ministry, has become the latest property company to see its bonds slump. Its 4.75% note due 2030 fell to as low as 73.48 cents on the dollar, with spreads over comparable Treasuries widening to a record 800 basis points, according to data compiled by Bloomberg.

That’s despite the firm being rated investment-grade at two global credit assessors and holding about 54 times more cash and equivalents than China Evergrande Group. Sino Ocean’s shares have been doing better, rebounding 35% from their September low. They rose 3.5% Monday.

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