Fixed income

What lies ahead for Chinese property bonds

26 January 2023 • 5 mins read

Source: AFP

  • Property bond prices have run ahead of fundamentals and the high-quality names are looking expensive.
  • The sector landscape remains mixed and governmental efforts remain key in restoring sector health.

Since mid-Nov 2022, China’s central government and relevant regulators have announced a series of comprehensive targeted measures to stabilise the property market including effective actions directing liquidity to the sector. The constructive tone has sustained into Jan 2023 and property bond prices, included the distressed ones, have rallied. We think the prices should have found some floor after the policy pivot, and are further supported by the on-going governmental efforts to revive the property sector.

The outlook for the sector remains mixed.  In 2023, we will be looking out for the missing pieces that would fuel a more wholistic sector recovery. Key catalysts are 1) an improvement in home sales, 2) broadened financing support beyond the same few top tier names, and 3) progress on debt restructuring for defaulted companies. If the existing pain points remain unresolved, the exuberant sentiment as well as the rally may run out of steam.

Overall, we think we are still some time away from completion of debt restructuring for most defaulted names, as the physical property market recovery is crucial for restructuring plans to work. We expect a lengthy process for most defaulted names, particularly for those with more complicated capital structures. Even with a preliminary framework, time is still needed to negotiate with holders, deal with potential legal disputes with other creditors and/or resistance from minority shareholders, get minimum approval levels and go through scheme arrangements/court hearings etc.

For most defaulted developers, contracted sales have declined significantly since entering into distress, and unless sales and/or financing cash flows resume, we expect little to no net cash inflows for offshore debt repayment in the next few years. We expect developers with still-functioning onshore loan/bond financing as well as those with offshore assets and/or better-quality onshore projects to potentially come out with more viable debt restructuring plans than those developers without. We do not rule out the possibility that some of the weaker ones will gradually exit the sector.

Ultimately, a successful debt restructuring hinges on sustainable capital structure which can be adequately serviced by cashflows from normalised continuing operations and/or asset disposals at reasonable valuation. The key assumption here is the company has the capability to bring back operations to a normalised state and honour future cash obligations.  In certain cases, new capital injection from key shareholders and/or new senior secured creditors may be required to provide initial working capital to kickstart the stalled operations and/or to buyout bondholders who would like to exit early (usually at a large discount).

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