Festering Evergrande contagion worries push China spreads to record

CHINA - SHANGHAI. Worries over possible spiralling effects of a debt crisis at developer China Evergrande Group drove Chinese high-yield spreads to record highs on Wednesday, days after the company missed another dollar bond deadline.

The company, which has more than $300 billion in liabilities, on Monday missed its third round of interest payments on its dollar bonds in three weeks even as other firms warned of defaults.

In the clearest sign yet of global investors' worries of spreading debt contagion, the option-adjusted spread on the ICE BofA Asian Dollar High Yield Corporate China Issuers Index surged to a fresh all-time high of 2,337 basis points on Tuesday evening U.S. time, above a previous top of 2,069 basis points on Friday.

Investment grade spreads also jumped to their widest in more than two months.

"We see a risk that a disorderly correction in the property market could cause sharp price declines, hitting the personal wealth of homeowners," Kim Eng Tan, a credit analyst at S&P Ratings, said in a report.

"Such an event could also contribute to large-scale losses by investors in wealth management products, and the contractors and service firms that support the developers."

Evergrande did not pay nearly $150 million worth of coupons on three bonds due on Monday, following two other missed payments in September.

While the company has not technically defaulted on those payments, which have 30-day grace periods, investors say they are expecting a long and drawn-out debt restructuring process.

Chinese property companies' bonds continued to fall on Wednesday, comprising seven of the top 10 losers among Shanghai-traded corporate bonds.

Bonds issued by developers including Shanghai Shimao Co Ltd China Aoyuan Group and Country Garden Properties Group fell between 1.6% and 7.4%, according to exchange data.

Dollar bonds also fell, although traders said limited market liquidity following earlier routs meant prices were only indicative, with tradeable prices possibly 10-20 points lower than screen prices.

Marketaxess quoted a Kaisa Group Holdings June 2026 bond as falling 0.9% to 41.125 cents. Its yield has risen to around 40%.

In equity markets, a sub-index tracking A-shares of property firms fell 0.7% against a 1.2% rise in the blue-chip CSI300 index.

Markets in Hong Kong were closed on Wednesday due to a typhoon affecting the city.

WALL OF DEBT

Evergrande's main unit, Hengda Real Estate Group Co, faces a 121.8 million yuan onshore bond coupon payment on Oct. 19 and Evergrande has another $14.25 million dollar bond coupon due on Oct. 30.

Debt pressures extend far beyond Evergrande. Chinese property developers have $555.88 million worth of high-yield dollar bond coupons due this month, and nearly $1.6 billion due before year-end, and Refinitiv data shows at least $92.3 billion worth of property developers' bonds maturing next year

Evergrande's mid-sized rival Fantasia has also already missed a payment and Modern Land and Sinic Holdings are trying to delay payment deadlines that would still most likely be classed as a default by the main rating agencies.

"These stories have challenged the notion that Evergrande is one of a kind," analysts at Capital Economics wrote in a note.

While China's policymakers will likely be able to avoid a "doomsday scenario", the overextended property sector will continue to weigh on the world's second-largest economy, they said.

"Even following an orderly restructuring of the worst-affected developers with minimal contagion to the financial system, construction activity would still almost inevitably slow much further."

The IMF said on Tuesday that China has the ability to address the issues linked to Evergrande's indebtedness, but warned that an escalation of the situation could lead to the emergence of broader financial stress.

The $5 trillion Chinese property sector, accounts for around a quarter of the Chinese economy by some metrics and is often a major factor in Beijing policymaking.

Editor: Wahyu T.Rahmawati