Two dollar bondholders of Sunac China Holdings Ltd. had yet to receive interest payments by Wednesday’s deadline, raising the risk of the struggling Chinese developer defaulting. Junk debt and Sunac shares both fell.

If Sunac, China’s fourth-largest developer by sales, fails to pay a total of $29.5 million, a cross-default on its other offshore debts could result. Meanwhile, the Federal Reserve has listed the Chinese real estate market as one of the near-term risks to the US financial system, along with the Russian-Ukrainian war and inflation.

A Bloomberg index tracking China’s junk-rated offshore banknotes fell for a fifth session on Tuesday, hitting its lowest level since March. A Bloomberg Intelligence index of developer stocks fell 0.7% on Wednesday.

Key developments:

  • China risks ‘tsunami’ virus if Covid Zero is abandoned: study
  • Chinese No.4 Developer Runs Out of Time for Bail Payment
  • Add China real estate risk to Fed’s list of concerns: China Today

Shaking up China’s real estate sector may boost option currency bond games: BI (2:09 p.m. HK)

According to Bloomberg Intelligence analysts Andrew Chan and Daniel Fan, Chinese developers’ struggling bond valuations – with a median price of 27 cents – could provide an option-like play on the company’s potential restructuring. Offshore bondholders may have been dismayed by their treatment relative to onshore investors and the lack of audited results for some issuers, which likely helped push troubled bond prices lower.

Sunac bondholders yet to receive dollar coupon as deadline nears (1:45 p.m. HK)

Two holders of Sunac China’s 7.95% dollar bonds due 2023 had yet to receive interest payments as of midday in Hong Kong on Wednesday, before the end of a grace period.

Sunac missed an initial deadline for the coupon in April, and a 30-day grace period ends Wednesday. The total payment due is $29.5 million, according to data compiled by Bloomberg.

Sunac Offers More Collateral for 2024 4.78% Onshore Bond (1:30 p.m. HK)

Sunac China’s main onshore unit has offered credit enhancement measures for its onshore 4.78% 2024 bond, according to a statement to the Shanghai Stock Exchange.

New guarantees include President Sun Hongbin’s letter of guarantee and real estate projects in Qingdao and Zhengzhou.

Unused IPO funds from Chinese property managers could boost acquisitions: BI (10:30 a.m. HK)

Major Chinese property managers with unused listing products such as China Resources Mixc Lifestyle Services Ltd. and Poly Property Services Co. may step up acquisition of their third-party peers to boost revenue in coming years, particularly debt-laden developer units, according to Bloomberg Intelligence analysts Patrick Wong and Yan Chi Wong. Investor Concerns About Shimao Services Holdings Ltd.’s Financial Information could slow its future expansion, they said.

Zhongliang extends exchange and consent offers until May 16 (9:20 a.m. HK)

Chinese developer Zhongliang Holdings Group Co. extended its exchange offer and consent solicitation to 4 p.m. London time on May 16 from 4 p.m. London time on May 10, according to a statement to the Hong Kong Stock Exchange.

Fed Considers China’s Real Estate Market a Risk (8:57 a.m. HK)

In its financial stability report released late Monday, the Fed listed China’s housing market as one of the short-term risks to the US financial system, along with the Russia-Ukraine war and inflation. From the Fed:

  • 1) Banks have direct exposure to developers amounting to more than half of their Tier 1 capital, and “substantial” indirect exposure from loans to other businesses that are secured by real estate.
  • 2) Banks are also exposed indirectly via wealth management products sold to individuals.
  • 3) Local governments derive a significant portion of their revenue from the sale of land, and they too are heavily indebted. Local government debt, including off-balance sheet financing vehicles, exceeded 70% of Chinese GDP last year.

The direct impact is limited. US banks’ exposure to China amounts to less than 10% of their Tier 1 capital, according to the report. Chinese stocks make up about 1% of US portfolio investment and sales to China represent less than 5% of US corporate revenue.

But “if the fallout from the housing market intensifies and leads to significant strains on Chinese banks that reduce bank lending and GDP growth, the transmission of strains to the United States could be strong”, via the channels of the real economy and financial markets, the Fed mentioned. The report specifically mentions 2015 as an example, when China’s devaluation led to volatility spikes in global markets and a rising dollar.

A-Living Target Cut 43% by CICC on Weaker Earnings Outlook (8:48 a.m. HK)

CICC slashed A-Living Smart City Services Co.’s price target by 43%, citing weaker earnings forecasts as a declining real estate market weighs on demand for value-added services and profit margins from the company.

Its parent company Agile Group hasn’t bid for new land since December and Agile’s contract sales in the first quarter fell 47% year-on-year, which could add pressure on A-living, analysts including Yiyu Wang wrote in a note.

CICC lowered A-Living’s 2022 and 2023 earnings forecasts by 5% and 10%, respectively, and lowered its price target to HK$13.6 per share, while retaining its outperform rating on the title.

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