Goldman Sachs Asset Management still sees opportunities for strong returns in Chinese property firms’ high-yield dollar notes as business prospects have improved.
(Bloomberg) — Goldman Sachs Asset Management still sees opportunities for strong returns in Chinese property firms’ high-yield dollar notes as business prospects have improved.
New-home sales rose for a second month in March, signaling a recovery could be taking hold after Chinese regulators rolled out a series of measures starting late last year to pull the property sector out of its biggest meltdown.
“The high-return opportunity in our view exists today in private developers — both in companies that have not defaulted but also in some companies that have,” said Salman Niaz, Singapore-based head of Asia fixed income at Goldman Sachs Asset Management. Bond prices for Chinese high-yield property notes average around 50 cents on the dollar.
Meanwhile, profit potential for notes of government-owned builders is more constrained as credit risk premiums are “quite limited” because they haven’t faced the same level of stresses, according to Niaz. The liquidity crunch among Chinese developers the past two years has disproportionately hit private-sector builders, fueling record defaults last year.
“Our view is that most of the defaults are done,” he said. “There may be a few more defaults or distressed exchanges, but systemically most of the pain is behind us.”
In addition to rising home sales, progress has also occured on the debt-restructuring front. Major builders China Evergrande Group and Sunac China Holdings Ltd. have recently reached agreements with ad-hoc groups of offshore bondholders on recovery proposals.
Niaz predicts companies that generally have scale, diversification, exposure to high-quality cities and strong management teams will generate a better outcome for credit investors.
The real estate firms’ high-yield dollar bonds returned about 53% in the fourth quarter of 2022, according to a Bloomberg index, and climbed further in January following the government’s property support efforts and the scrapping of Covid restrictions. But the rally stalled as markets globally turned more risk averse, with central-bank rate hikes continuing and some US and European banks collapsing.
However, many difficulties remain. At least 15 property firms failed to release 2022 results by the end of March, resulting in stock-trading suspensions in Hong Kong.
One that did disclose annual data, state-backed Sino-Ocean Group Holding Ltd., had a qualified opinion from its auditor regarding insufficient information in certain areas. That fueled a three-notch downgrade from Moody’s Investors Service and added to downbeat sentiment about the company. Sino-Ocean dollar bonds have plunged as much as 50% the past month, according to Bloomberg-compiled data.
“We like the China reopening theme and we also think the prospects for the China property sector are positive, but there may be some volatility in the near term,” said Niaz. “We have to be pretty selective because not all developers are cut from the same cloth.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.