In late October, as a growing liquidity crisis across China’s property sector walloped developers’ bonds, a group of Chinese finance professionals got together on the messaging app WeChat to pool their funds and buy the unloved debt.
The first target was a 5.3% January 2022 bond issued by a unit of Yango Group (000671.SZ), trading at around half its face value and yielding in excess of 400%.
Punters were invited, via WeChat, to pool a minimum of $50,000 each for a chance to double their money, with a downside likely limited at 50%, according to a source who was invited to participate.
Yango, whose Chinese name means Sunshine City, had been hit by a series of credit rating downgrades over its weakened access to funding and would go on to reach agreements with investors to extend other debt payments to avoid a default.
“We have $100,000 secured, if we collect $200,000 it’s READY GO” the organiser told a WeChat group in messages. Less than an hour later on Oct. 22, the group had collected more than $300,000 as the organizer urged calm – before pitching another group buy of a Greenland Holdings (600606.SS) bond.
Yet, since the October WeChat group buy, the price of the Yango unit’s January 2022 bond has fallen more than 50% and the company has extended its repayment date by a year.
Even as worries over the payment abilities of Chinese developers continue to fester, driving the spread – or risk premium – on their riskiest dollar debt (.MERACYC) to record highs, some investors in China and overseas see similar opportunities in discounted Chinese debt.
The search for bargains has heated up after the selling extended to investment-grade (IG) names (.MERACCG), pushing their spreads to a near-seven-month peak, and on hopes that regulators may ease property curbs to avoid a sector-wide collapse.
A series of narrow escapes from defaults by China Evergrande Group (3333.HK), whose cash crunch sparked the sell-off, has helped to soothe nerves, though developers have continued to miss or make late payments on their debt.
“The widening of IG spreads provides select opportunities for investors to gain exposure to high quality issuers,” said Shaw Yann Ho, head of Asia fixed income at J.P. Morgan Asset Management, adding that included some better capitalised state-owned firms in a position to snap up distressed assets in the sector.
Recent rating downgrades, such as S&P Global’s move to relegate Shimao Group Holdings (0813.HK) to speculative grade, have also helped to clarify risks and could serve to stabilise investment-grade spreads, investors say.
Ho said supportive policies, including faster mortgage approvals and local government efforts to continue infrastructure construction would further benefit investment-grade firms.
Hopes for more support have risen as China’s economy falters under new measures to control COVID-19 outbreaks and power shortages that have hit factories.
But policy sources say the country’s central bank is expected to move cautiously on loosening monetary policy, while authorities look increasingly likely to stand firm on policies to curb excess borrowing by property developers.
That could continue to spell trouble for Chinese developers with bonds worth more than $90 billion maturing in the next year, according to Refinitiv data.
Edward Chan, director, corporate ratings at S&P Global, noted that all of the nearly 30 recent S&P rating actions on Chinese issuers had been negative. S&P has forecast continued market volatility in Chinese debt into 2022, with large debt maturities pushing more offshore defaults.
But Hayden Briscoe, head of Asia-Pacific fixed income at UBS Asset Management, said that default rates of around 20% would be required for investors to lose money, noting that he had seen money “flooding into the sector” from global high-yield investors.
Forecasting a bumpy ride, James Wong, portfolio manager at GaoTeng Global Asset Management Ltd, said that while he thinks the market is “really, really close” to the bottom, limited market liquidity will exaggerate moves both up and down.