The financial stresses afflicting Chinese property developers may be beginning to spread to more and more weaker borrowers. Highlighting this is the ongoing bond collapse for the Chinese owner of resort chain Club Med, Fosun International Ltd.
After a Monday selloff in Macau’s casino operators, prices dropped further Tuesday for some Chinese Industrial companies’ offshore debt, in what many are viewing as an ominous sign of contagion. At the same time, some of conglomerate Fosun International Ltd’s dollar bonds are now on track for record declines after last week’s slump.
Fosun’s troubles began last week, after Moody’s Investor’s Service highlighted contagion risk from China’s property sector declines. They put the firm on review for downgrade, spooking the market. Junk-rated developers who were unable to refinance debt have had record corporate-level defaults, due to not being able to sell new bonds, given yields have been over 20%.
As Fosun’s bonds suffer steep losses, and that spreads to non-property high-yield companies, it is pushing China’s junk dollar debt market into a new phase. All of this is a reminder of the high cost China inflicted on its businesses, especially those which were dependent on Shanghai’s operation, when it committed to its two-month Covid lockdown.
Henry Loh, investment manager at abrdn Asia said the dumping of Fosun’s offshore bonds “is a reflection of broader wariness of potential downside in this current market environment, with many risks remaining unresolved in China and globally. I’d imagine that the aggressive downward spiral experienced in Chinese real estate remains very fresh in investors’ minds so that will likely be a factor in many investors’ reaction.”
Moody’s said it put the company on review because of its tight cashflow. They described liquidity as, “very weak at the holding company level,” and not capable of covering debt maturing over the next year.
Moody’s also noted Fosun’s property exposure was vulnerable to contagion from the risks in China’s real estate sector. They also noted it would be challenging for Fosun to access the bond market now that investors are increasingly wary of such high-yield companies with exposures to the property sector.
Fosun, operates in sectors from pharmaceuticals to tourism and insurance, and was co-founded by tycoon Guo Guangchang,.
The credit assessor also cited contagion risks from China’s real estate sector on Fosun’s property exposure, saying it expects the firm to face challenges in accessing the bond market “amid onshore and offshore investors’ increasing risk aversion toward high-yield privately-owned companies with exposures to the property sector.”
