China's defaulted bonds cast a shadow on investors

March 02, 2023 (MLN): The outlook for recovery on China's defaulted bonds is bleak, with investors potentially facing a long wait and receiving little return on their investments.

This was the consensus among participants and panelists at S&P Global Ratings' annual Asia corporate credit conference. The property sector has been hit hard by tough conditions in China, resulting in an unusually high number of bond defaults since 2021.

Issuers in this sector have been "buying time" with debt extensions, but investors are losing confidence that they will be able to raise cash through home sales or asset disposals.

While some panelists predict that issuers and creditors will negotiate deals in 2023, it remains unclear how these agreements will be hashed out.

Recovery rates are expected to be between 0%-30% on defaulted bonds, leaving investors with little hope of significant returns. The prospects for debt-for-equity swaps or other structures also remain uncertain.

Participants at the conference polled by S&P Global Ratings overwhelmingly believed that recovery rates would be low, and the underlying property market in China may stabilize in 2023, but gains are expected to be minimal.

Other issues discussed at the conference included the likelihood of bondholders petitioning for liquidation and the disadvantages of offshore versus onshore creditors.

Panelists also considered whether debt-for-equity swaps would play a significant role in workouts. As investors face the possibility of recovering only a fraction of their investment, it is clear that this will be an eventful year for restructuring. Some issuers have not cooperated, but panelists believe that real restructuring will occur as owners, creditors, and other shareholders align.

Despite the challenging environment, the conference drew over 1,000 attendees, highlighting the significance of the issue for the credit investment community.

While the report published by S&P Global Ratings does not constitute a rating action, it underscores the seriousness of the situation facing investors in China's property sector.

With recovery rates expected to be low, the conference's discussions underscored the importance of carefully assessing risks before investing in the sector.

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