Thursday, May 19 2022

(Bloomberg) – An exchange-traded fund shows how investors are ramping up bets on a rebound in Chinese real estate bonds.

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The inflow of capital brought total assets of the iShares USD Asia High Yield Bond Index ETF to $ 1.87 billion, from $ 383 million at the end of August, an increase of 388%. In October alone, the fund attracted a record $ 773 million. Some 29% of the Singapore-listed ETF’s holdings are in real estate, including notes issued by China Evergrande Group and Sunac China Holdings Ltd.

While much of the buying was early – the ETF fell to a low on November 9 – Chinese developer bonds have climbed in recent days as the government takes action to limit contagion in the real estate sector. Companies like Allianz Global Investors and Axa Investment Managers have said they are looking to increase their stakes by joining Goldman Sachs Asset Management and Oaktree Capital Group.

The tide could turn for China’s real estate industry, said David Newman, who helps manage around $ 3 billion as investment director for global high yield at Allianz Global Investors. “We started buying a few higher quality, lower priced bonds for our global portfolios, reducing a long-term underweight position. “

Government efforts to ease financing conditions for the country’s real estate sector have focused on top-rated companies. Authorities are fine-tuning the crackdown on the sector to avoid a systemic liquidity crisis and ensure social stability, according to bankers and regulators who have been briefed on the changes.

The yield on a Chinese dollar junk bond tracking gauge fell to around 20% from a peak of almost 25% on November 9. obligations. At least four companies defaulted earlier this month.

Jim Veneau, head of fixed income for Asia at Axa Investment Managers, said the company’s Asian high-yield fund is focusing more on Chinese real estate developers, although repositioning in risk is being done with caution. and gradually.

“The risk levels are readjusted almost daily depending on the evolution of asset sales and policy clarifications, this is a delicate balance because risk reduction can end up decapitalizing a fund”, Veneau said. His company manages approximately $ 3.3 billion in Asian fixed income securities, including approximately $ 400 million in Asian high yield securities.

There are still a lot of risks. S&P Global Ratings this month said it expects more real estate company defaults next year, as shrinking profit margins restrict cash inflows, while the credit crunch exacerbates refinancing risks. The builders also have a total of $ 13.4 billion in dollar bonds and the equivalent of $ 12.6 billion in yuan notes maturing in the first quarter, according to data compiled by Bloomberg.

Real estate companies are stepping up their efforts to raise funds, as high borrowing costs continue to make refinancing through the offshore bond market prohibitive. In recent days, Evergrande announced a divestiture of its stake in HengTen Networks Group Ltd., Sunac’s majority shareholder provided $ 450 million of its own funds in the form of an interest-free loan, while Country Garden Services Holdings Co. unveiled its second equity offering. in six months.

Alan Siow, Hong Kong-based portfolio manager at investment manager Ninety One, said he was constructive on the sector after seeing signs of policy change.

“We hope that the [liquidity] the disruptions can be corrected by re-establishing standardized access to finance, ”said Siow. Real estate companies “do the right thing, that is to say asset disposals, project sales; and shareholders put money back into the business through rights issues and shareholder loans, ”he said.

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