China Evergrande Says Construction Has | Stock Market News Today


Troubled property developer

China Evergrande Group


EGRNF -10.55%

said construction work has resumed at more than 90% of its stalled residential projects, adding that it has picked up the pace of delivering apartments promised to home buyers across the country.

Evergrande,


EGRNF -10.55%

in a statement Sunday night, said more than 80% of its suppliers of materials and decorative services have “resumed cooperation,” and that it has signed thousands of new contracts with various suppliers. At the end of August, the developer disclosed that construction had been suspended at some projects after it fell behind on payments. And by October, hundreds of Evergrande’s unfinished developments were affected by work stoppages.

With just a few days to go before the end of 2021, Evergrande said it intends to deliver 39,000 homes in 115 projects to buyers across China in December. It compared that to its completion of fewer than 10,000 units in each of the preceding three months.

The world’s most indebted real-estate firm Evergrande has embarked on a social media campaign to show construction has resumed and says it’s doing whatever it takes to deliver homes. WSJ compares these posts with ones from upset buyers. Photo Composite: Emily Siu

In a post on social media Monday, Evergrande said apartment projects have been handed over in batches in 18 provinces and it released photos of completed buildings adorned with bright red decorations and people signing papers to take ownership of their homes.

Despite this, Evergrande still has many more commitments to fulfill and its debt crisis remains unresolved. The 25-year-old developer used to be one of the country’s largest by contracted sales and is on the hook to deliver units to more than one million people. Many buyers made large down payments on unfinished flats, expecting to take ownership of them in a few years.

Hui Ka Yan,

Evergrande’s founder and chairman, said that “under the care and guidance of governments at all levels,” as well as support from partners, financial institutions and other constituents, the developer has made progress in its commitments to homeowners.

He added that Evergrande would do whatever it takes to resume work and deliver homes and predicted that the firm will eventually be able to “resume sales, resume operations, and pay off debts.”

Hui Ka Yan, China Evergrande’s chairman, in Hong Kong in 2019.



Photo:

Paul Yeung/Bloomberg News

The company’s statement followed comments over the weekend from two Chinese regulators which said they would safeguard the rights of homeowners and keep the property sector stable. Beijing has been trying to prevent Evergrande’s debt crisis from hurting the many small businesses and ordinary citizens that the developer owes money and apartments to.

Wang Menghui,

head of China’s Ministry of Housing and Urban-Rural Development, said in an interview with the state-run Xinhua News Agency that the regulator will address the risks of some leading developers that fail to deliver projects on time, with the goal of “guaranteeing home deliveries, protecting people’s livelihoods and maintaining social stability.”

The People’s Bank of China separately said—as part of a wide-ranging statement on the economy—that it would protect the rights and interests of homeowners and promote the healthy development of the country’s real-estate market.

Evergrande, the world’s most indebted developer, has been struggling under the weight of roughly $300 billion in liabilities, including around $20 billion in international bonds. The developer has missed payment deadlines on some of its dollar bonds, setting the stage for a massive and complex restructuring. Major credit raters have declared it to be in default.

Earlier this month, the conglomerate sought help from the government of its home province, Guangdong. It has since set up a risk-management committee that includes representatives from several state-backed entities.

Evergrande recently said the committee is working to help contain its risks and will engage with its creditors. Some international bondholders, however, have said there has been little communication from the company so far, the Journal reported last week.

The company’s Hong Kong-listed shares have plunged in value this year to historic lows and its dollar bonds are trading at deeply distressed levels. Markets in Hong Kong were closed Monday for a public holiday.

Write to Anniek Bao at [email protected]

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Investors Rush Into ‘Pick-Your-Poison’ Junk Bonds | Sidnaz Blog


Risky companies are selling junk bonds at a record pace, getting ultralow borrowing costs and increasingly loose borrowing terms, such as “pick-your-poison” clauses.

One recent example was the debt package that funded the buyout of Birkenstock GmbH. The maker of frumpy-but-expensive German sandals was taken over in April by the private-equity fund of

Bernard Arnault,

the French billionaire who controls LVMH Moët Hennessey Louis Vuitton SE.

Birkenstock recently sold €430 million of CCC rated bonds, equivalent to around $522 million, at the riskier end of the ratings scale. The bonds, sold as part of a debt package, yield just 5.25%, comfortably below prevailing market rates. That is despite the debt being worth 7 times the company’s earnings.

The bonds also contain terms that allow the firm to take on extra debt with a pick-your-poison clause, a term coined by research firm Covenant Review to describe a way for borrowers to get around traditional limits on borrowing.

Birkenstock recently sold €430 million of CCC rated bonds, equivalent to around $522 million.



Photo:

Richard B. Levine/Zuma Press

The pick-your-poison nickname comes from the fact that both cash being paid to shareholders and extra debt being added to the business could be “poison” for existing lenders, but the clause lets the owners of the company choose between taking a dividend or borrowing more money.

Birkenstock declined to comment on its debt package.

Borrowers have been able to demand such easy terms because money has flooded into the junk-debt market and particularly into the riskiest parts, where the likelihood of default is highest.

“There is a lot of faith-based investing going on,” said

Fraser Lundie,

head of credit at Federated Hermes.

Triple-C bonds are the most overbought section of the fixed-income markets, according to analysts at

Bank of America.

The flood of interest has helped make triple-C bonds the best performing part of the market globally, with returns of nearly 6.5% up to the end of April, they said. That contrasts with the worst performing bonds, 30-year Treasurys, which have lost nearly 14%, they added.

Recent months have brought some volatility to government bond and currency markets, but risky corporate debt has seen prices rise and yields fall consistently over the same period, leaving some investors concerned about returns being too low.

Buoyant markets have helped many companies extend the life of their debt and lower their borrowing costs, making them more stable, Mr. Lundie said. “But particularly in triple-C-rated debt, the share of the market trading in distressed territory is at multiyear lows,” he said.

European borrowers especially have been able to sell debt at low yields and with more aggressive terms.

“Europe is at the sharp end of the stick in terms of highly aggressive, private-equity sponsored deals,” said Alastair Gillespie, a legal analyst at Covenant Review. “Birkenstock is one of the very aggressive top-tier transactions.”

Other deals to have similarly loose terms include Swiss chemicals company

Lonza

AG and Finnish fiber company

Ahlstrom-Munksjö Oyj.

In all, nearly 25% of European junk bond deals have had pick-your-poison clauses in the first quarter of 2021, a sharp rise from previous quarters, according to Covenant Review. Among U.S. deals about 14% had such terms, the research firm found in a recent survey.

European corporate debt markets are much smaller than the U.S. because banks still provide a much larger share of financing. U.S. junk bond issuance of almost $200 billion in the first four months of 2021 is well ahead of the previous year-to-date record of $133 billion in 2015, according to Dealogic. It is also much larger than the $73 billion issued in Europe.

But the small size of the debt markets is part of the problem in Europe. More investors are being driven to buy junk bonds because the investment-grade end of the corporate credit market is being dominated by the European Central Bank’s bond-buying programs, said

Esty Dwek,

head of global market strategy at French fund manager

Natixis.

“The ECB is buying so much of the corporate bond market that it is forcing yields down everywhere and forcing investors to take more credit risk,” Ms. Dwek said.

While she isn’t buying more high-yield debt right now, Ms. Dwek said she doesn’t expect a selloff and there will be more discrimination between bonds in the future because issuance has been so large.

Investment-grade yields are so low in Europe that the market is becoming uninvestable, said Tomas Hirst, European credit strategist at Credit Sights. As well as investors putting more money into high-yield debt funds, investment-grade fund managers are already filling up their allowances for risky bonds too, he added.

The strong tide of money into the market is still lifting all risky boats, partly because Europe is behind the U.S. in terms of reopening, which makes it more difficult to pick winners and losers among companies. “In the U.S., things are a bit further ahead and investors are starting to allocate a bit more to potential winners,” Mr. Hirst said.

Write to Paul J. Davies at [email protected]

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U.S. Treasury Yields Climb Sharply | Sidnaz Blog


Selling in U.S. government bonds picked up steam again Friday, pushing yields back toward recent highs and putting an end to several sessions of relative stability.

In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 1.633%, according to Tradeweb, compared with 1.525% Thursday.

Yields, which rise when bond prices fall, climbed steadily overnight despite no obvious catalyst, leaving analysts searching for explanations.

In notes to clients, some said that President Biden’s prime-time speech on Thursday night might have made investors more optimistic about the economic outlook. In the address, Mr. Biden directed states to make all American adults eligible to receive a vaccine by May 1 and said families and friends would likely be able to gather in small groups to celebrate Independence Day.

Some analysts also attributed the move at least in part to “supply indigestion” after the U.S. Treasury sold $120 billion of three-year notes, 10-year notes and 30-year bonds over the previous three days. Though demand for those auctions was reasonably strong, large auctions can sometimes create aftershocks if investors feel satisfied with what they just bought from the Treasury and are hesitant to buy more.

The U.S. Treasury sold $120 billion of three-year notes, 10-year notes and 30-year bonds over the previous three days.



Photo:

Al Drago/Bloomberg News

Yields started rising sharply a month ago after the same series of auctions, increasing concerns that a flood of new debt could exacerbate pressure on the market caused by expectations for a strong economic rebound and the prospect for higher short-term interest rates set by the Federal Reserve. Some traders say the market might also be more vulnerable on Fridays, with investors nervous about buying Treasurys ahead of the weekend.

As yields rose Friday, traders were watching to see if the 10-year yield would rise above 1.626%, its recent intraday high set a week ago. It breached that level in the midmorning, leading to a brief spurt of more selling.

Investors pay close attention to long-term U.S. Treasury yields because they play a large role in determining borrowing costs across the economy. Many investors also use the 10-year Treasury yield as a discount rate in formulas to value stocks—making rising yields a particular threat to technology companies that are expected to make a greater proportion of their profits further in the future.

Investors also are gauging whether weakness in Treasurys spills over into the corporate bond market. While yields on investment-grade corporate bonds typically rise along with those on Treasurys, many consider it a bigger problem if they climb quickly, causing a larger jump in borrowing costs.

As it stands, borrowing costs remain very low for most businesses, though there has been a modest uptick in the gap between corporate and Treasury yields in recent weeks.

The attractive borrowing market was highlighted on Thursday when

Verizon Communications Inc.

sold $25 billion of bonds, tied for the sixth-largest corporate bond sale on record, to help fund its recent spectrum purchases.

Overall, nonfinancial companies have issued $81 billion of investment-grade bonds since March 1, up from $38 billion in the previous two-week period, according to Dealogic.

Write to Sam Goldfarb at [email protected]

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