China's Junk-Bond Market Opens With a $400 Million Sale

A Chinese commercial property company sold U.S. dollar bonds on Thursday with yields topping 12%, reopening the market for junk debt from the country after a wave of defaults last year. This is the first time a Chinese company has sold junk bonds since last year's defaults, and the high yield shows that investors are still cautious about lending to Chinese companies.
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Dalian Wanda Commercial Management Group Co. tested investors' appetite for risk this week with a two-year bond offering by one of its units. The company, which operates shopping malls across China and is controlled by Chinese billionaire Wang Jianlin, is one of the largest commercial real estate developers in the country.
The unit sold bonds with a $400 million face value and an 11% coupon. The securities were sold at 97.6 cents on the dollar, which enabled the deal to be priced to yield 12.375%. The new debt was rated BB by Fitch Ratings and Ba3 by Moody’s Investors Service, levels that sit in the speculative-grade ratings.
Some investment bankers predicted that the transaction could inspire other Chinese real-estate firms to come back to the table to discuss potential deals. But Leonard Law, a senior credit analyst at research firm Lucror Analytics, said investors should be wary about reading too much into the deal.
"It's hard to say for sure whether the offshore bond market has reopened for property developers," Mr. Law said.
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Many investors sold their Chinese high-yield dollar bonds last year, after residential-property giants China Evergrande Group, Kaisa Group, Sunac China and many of their peers defaulted on their international debt. New junk-debt issuance slowed to a trickle as bond prices collapsed and yields soared, making it too costly for most companies to borrow.

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The yield on outstanding junk bonds from Chinese companies that haven't defaulted hit a record high of 33% in October 2022, according to an ICE BofA index. This is the highest yield on these bonds since the index was created.
In November, the Chinese government announced a series of measures to help struggling property developers get access to financing. This lowers their default risk and has sparked a rally in junk bonds. As a result, the average yield for sub-investment-grade Chinese dollar bonds has fallen to about 17%.

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Dalian Wanda Commercial Management Group's business model is unique compared to other residential apartment sellers such as Country Garden Holdings Co. and its peers. The former focuses on commercial properties, managing and operating hundreds of Wanda Plazas across China. The proceeds from the recent debt sale, led by Credit Suisse, will help refinance the group's existing debt.

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Asian investment-grade bonds have been selling well this year, but Freddy Wong, head of Asia Pacific fixed income at Invesco, says investors are likely to be cautious when it comes to high-yield bonds.
According to Wong, any new issuance in the Chinese dollar junk-bond market will be skewed toward companies with stable fundamentals.
                                        
"For now, the market is not telling you that they are fully ready," he added.