Credit markets will resist Evergrande shocks

LONDON, September 23 (Reuters Breakingviews) – Is China Evergrande (3333.HK) another Lehman Brothers moment? Not at all, according to the $ 40 trillion global corporate debt market. International credit investors have good reason to be so nonchalant about the potential ripple effects of the Chinese real estate giant’s troubles with $ 300 billion in debt.

Certainly, the Evergrande idle crash had some impact. As the group’s 2025 dollar bonds collapsed to trade at just 30% of face value, the riskier part of the Chinese debt market suffered. The average yield on dollar bonds issued by Chinese companies rated for junk food has doubled to around 16% year-to-date, according to an ICE Bank of America index. And U.S. safe-haven bonds rallied on Monday as global equity markets faltered.

But these ripple effects appear to be contained. In the United States, where some $ 19 billion of Evergrande bonds are issued, the average additional yield required by investors to hold rated debt is stable at around 310 basis points, according to another ICE Bank of America index. This is even lower than the levels seen in the heady days of September 2006. And the yield spread on bonds issued by high-quality US and European companies is lower than the levels seen at the end of 2007, the year before the end of 2007. collapse of Lehman Brothers.

It’s logic. Western government bond yields are still low and below market expectations for future inflation. Investors need to take risks if they do not want price increases to erode their returns.

New variants of Covid-19 or a collapse in Chinese ownership could hurt the global economic recovery. But companies have emerged from the pandemic healthy after raising funds, cutting costs and skimping on investments over the past 18 months. European corporate debt has fallen to 2.3 times behind EBITDA and that multiple could drop as much as twice by the end of the year, its lowest since before Lehman’s collapse in 2008, estimate Citi analysts. Meanwhile, Moody’s predicts a global corporate default rate of just 1.7% by year-end, less than half the historical average.

Resilience could turn out to be an Achilles heel. Persistent demand for corporate debt will keep borrowing costs low, potentially prompting more companies to prepare to fund shareholder payments. This, however, will be a problem for another year.

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NEWS CONTEXT

– China Evergrande will make it a top priority to help retail investors buy back their investment products, the chairman of the indebted real estate giant said on September 22.

–Hui Ka Yan’s comments came as Evergrande is due to pay $ 83.5 million in interest on a dollar-denominated offshore bond on September 23. The group said on September 22 that it had “resolved” a payment due on a domestic bond issued by its Hengda Real Estate Unit.

– The group missed an interest payment owed to domestic banks, Bloomberg reported on September 21.

– Evergrande has $ 300 billion in debt. About $ 19.2 billion is in offshore dollar-denominated bonds, according to CreditSights, a research firm. The real estate group’s 8.75% bonds due 2025 are now trading at 25% of their face value, according to data from Refinitiv.

Editing by Swaha Pattanaik and Karen Kwok