Beijing's bond market meltdown brings world of hidden bills to light

China’s property developers are struggling to pay bills that many of their bond investors didn’t know were there in the first place. Missed payments on off-balance sheet IOUs such as high-yield consumer products, secre­tive loans and private bond guarantees have rocked China’s credit market in recent weeks.
 

Dollar bondholders are struggling to know their place in the repayment queue in the event of a default, forcing a dramatic repricing of risk that’s all but frozen the primary market for developers. 
 

Kaisa Group said it failed to meet payments on wealth products, triggering a plunge in its bonds and shares. Fantasia Holdings Group defaulted on a dollar bond last month only weeks after assuring it had sufficient working capital and no liquidity problems. Its failure to pay undermined the credibility of Chinese issuers just after Bloomberg reported China Evergrande was on the hook for an unknown bond issued by a separate entity.

The repeated sh­o­c­ks have only worsened inve­stor sentiment. An index tracking developer shares slum­p­ed as much as 3.3 per cent on Frid­ay to its lowest level since March 2017. China Aoyuan tumbled ov­er 15 per cent. Shimao Group dollar bond due 2026 sank abo­ut 10 cents to 71 cents on the dollar. 

The rout has sent junk dollar bond yields toward 22 per cent. That makes it prohibitively expensive for firms to tap the offshore market to repay debt as they did in the past. Other avenues for cash-raising are narrowing rapidly. 

Plunging home sales have curbed revenue, while finding buyers for asset disposals is proving challenging. Evergr­ande last month ended discussions to sell a controlling stake in its property-management business that would have raised about $2.6 billion.