China Evergrande Fallout hits Western bond funds

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The potential default of real estate developer China Evergrande Group weighs on funds in Europe and the United States who were seeking high yields in the Chinese corporate bond market.

Fears that Evergrande might not pay its bonds this month have triggered the sale of other real estate companies in the country, weighing on funds managed by Ashmore Group,

ASHM -0.18%

BlackRock Inc.

BLACK 0.39%

and Pacific Investment Management Co., among others.

While Evergrande bonds traded around 25 cents on the dollar for much of September, the spread sale on Monday to other big developers. Yuzhou Properties’ 8.5% bond due 2024 fell about 10% to 75 cents on the dollar, according to Advantage Data Inc.

Evergrande, China’s most indebted real estate developer, has kept global markets on alert and sparked protests in his country as he struggles to survive. WSJ explains why the corporate crisis raises questions about the state of the world’s second-largest economy. Photo credit: Alex Plavevski / Shutterstock

Fears of a spread of fallout hit U.S. stocks and bond yields on Monday, pushing the benchmark 10-year Treasury bond yield down to 1.308%, Tradeweb says,

from 1.369% Friday.

Western fund managers have increasingly bought bonds from Chinese companies in recent years despite signs of a real estate bubble. Buyers were looking for investments that paid more than the anemic returns in their home markets and could benefit from China’s strong economic growth relative to developed markets. Many also believed the Chinese government would bail out Evergrande if it collapsed due to its size – the company was in debt of around $ 89 billion in June.

Some of the Chinese bulls, like Ashmore, were specialists in emerging markets, but others were global bond funds that traded in developed and developing markets.

One of Ashmore’s biggest funds fell around 1% last week and is underperforming peer funds by 3.62 percentage points this year, according to Morningstar data..

The company owned by British financier Mark Coombs also performed poorly in 2020 after big bets in Argentina, Ecuador and Lebanon quickly turned against it. Its stock has fallen about 20% this year, according to data from S&P Capital IQ. A spokesperson for Ashmore declined to comment.

A global income fund managed by BlackRock lost about 0.31% last week and is about a percentage point behind its competitors in 2021. The Ashmore fund was about 5% invested in Chinese companies and the BlackRock fund had approximately 7% exposure.

Concerns may be overstated that the Evergande default could trigger a systemic crisis in China, much like Lehman Brothers Holdings Inc. did in the United States, because other developers are performing well, Alan said. Siow, portfolio manager at Ninety One.

“We don’t think Lehman is an appropriate analogy,” said Mr. Siow, who has no Evergande debt in his emerging market corporate bond fund and is focused on finding “the companies best positioned to succeed in this environment. “

Distressed hedge funds are also turning to Chinese corporate bonds, hoping to buy cheaply and profit from debt restructuring or selling when the broader market rebounds. “We do a lot of heavy work on [China]Said a portfolio manager of a New York-based fund.

A group of Evergrande shareholders have formed a committee in recent weeks to create an organized negotiating bloc in restructuring talks with the company and the Chinese government, a person familiar with the matter said. Moelis & Co investment bank.

and the law firm Kirkland & Ellis LLP advise the group, the person said.

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China Evergrande Group: stalled construction, massive debts

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Appeared in the print edition of September 21, 2021 under the title “US funds suffer from Chinese debt drop.”


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