China’s real estate crisis is pushing green bond investors to see red

Before China’s real estate sector struggled, developers had rushed to issue green bonds, making it one of the most prolific corporate issuers in this fast-growing corner of global finance.

But the sell-off in China’s housing bond market in recent months and a series of defaults have sent prices plummeting for many of these dollar-denominated green or sustainable bonds, which fund green or social projects. Creditors suffered heavy losses. Several of the stocks are now trading at less than 30 cents on the dollar, indicating deep skepticism among investors that they can recover anything close to original value.

Chinese property developers are facing a difficult mix of government restrictions on borrowing, falling home sales and weak sentiment among homebuyers and investors. The rapid growth of environmental debt markets has opened up a new funding channel for an already heavily indebted industry.

“Many investors have been too quick to focus on the open notion of green benefits” rather than focusing on overall borrower creditworthiness, said Jeff Klingelhofer, co-chief investment officer at Thornburg Investment Management.

“Because green bonds remain relatively scarce and attract large inflows, issuers are often able to tap into the market during turbulent times and at more attractive yields,” he said.

Sales of green bonds by Chinese property companies have grown at an even faster pace than a booming global market. Chinese real estate companies issued $9.6 billion in green dollar bonds in 2021, up from $2.5 billion the previous year, according to Dealogic data. Over the same period, total global sales of these bonds by non-financial corporations rose from $29 billion to $64 billion.

For a time, the boom seemed to work in everyone’s favor. Bonds have helped put a greener luster on an industry that is gobbling up land and materials such as concrete, steel and glass. Issuers said the money would help fund projects such as improving the energy efficiency of buildings, reducing emissions and introducing recycling facilities.

Meanwhile, investors in Asia hailed the deals, saying the extra volume was helping grow a market that lagged its counterparts in Europe and the United States, and had previously been largely bond-based. green of Chinese banks.

Demand was often high: Sinic Holdings Group Co., which held risky B-type credit ratings, sold its first green bond in January 2021. Investors placed over $2 billion worth of orders for the note at one year of $250 million, helping Sinic reduce the bond’s coupon to 9.125%, lower than expected.

An investor who bought green bonds sold by Chinese property developers Cifi Holdings (Group) Co. and Zhenro Properties Group Ltd.

said he bought them because he knew the companies and their business practices, rather than because of the targets set out in the green bond frameworks. He added that the sector would benefit from better transparency.

Sinic sold its first green bond in January 2021.


Photo:

alex plavevski/EPA/Shutterstock

However, the situation has rapidly changed in recent months, with Chinese property companies coming under increasing financial stress. Several environmental, sustainability and governance (ESG) bond issuers are among those who have defaulted on their dollar debt, including Shenzhen-based Kaisa Group Holdings Ltd.,

which in December defaulted on $400 million of 6.5% sustainability bonds issued a year earlier.

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Kaisa, one of the largest offshore borrowers among Chinese real estate companies after China Evergrande Group,

hired financial advisers to help restructure all of its $11.8 billion in dollar bonds. Some of Kaisa’s smaller peers that have issued ESG bonds, such as Sinic and Modern Land (China) Co., have also defaulted.

Others, like Yuzhou Group Holdings Co.

and Yango Group Co.

, attempted to ease their financial woes by negotiating so-called distressed debt swaps with the holders of some of their dollar bonds. This process, seen by ratings firms as a form of default, has helped drive down the prices of their other international debt, including their green bonds.

Just over a year ago, rot-rated Yuzhou was able to sell $562 million worth of green bonds due 2027, offering investors a relatively slim coupon of 6.35%. These bonds were recently offered at 21.5 cents on the dollar, according to Tradeweb.

The world’s most indebted property company, Evergrande, has embarked on a social media campaign to show construction has resumed and says it is doing whatever it takes to deliver homes. WSJ compares these messages with those of disgruntled buyers. Photo composition: Emily Siu

Write to Frances Yoon at [email protected]

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