China’s high-yield property issuers are using bond exchanges to avoid triggering defaults, indicating the sector’s real default rate is far higher than reported, says Goldman Sachs.
Goldman analysts Kenneth Ho and Chakki Ting estimate the default rate at nearly a quarter of outstanding bonds this year rather than the 5.5% if bond exchange transactions are included.
“If we assume all the bonds from issuers that have entered into bond exchange or maturity extension transactions as being in default, the (year-to-date) default rate would rise to 23.4%,” they said.
Of bonds in the sector that have passed their final maturity dates so far this year, 31% have entered into bond exchange or maturity extension transactions, 26% have defaulted and 42% were fully repaid.
Credit Stresses Picking Up
Ho and Ting said they maintained a default forecast for the sector of 19% for 2022, with a bull case of 10.5% and a downside case of 31.6%.
“Whilst credit stresses have picked up, China policymakers have also reiterated their accommodative policy stance,” they said, adding that “risks are clearly tilted towards the downside case”.
More bond exchanges and defaults are likely, with $2.3 billion maturing in April, and more than $3 billion each in June, July and August, they said.
Liu He, China’s economic tsar, said on Wednesday that the government needs to reduce risks in the property industry, and proposed measures to facilitate a new development model for the sector.
- Reuters, with additional editing by George Russell