The third quarter of 2021 was a volatile one with three-quarters of our dollar bond universe ending in the red in terms of price return ex-coupon. This is in contrast to Q2 which saw 67% of dollar bonds delivering a positive price return, reversing losses from a gloomy Q1. The somber third quarter was largely due to a massive selloff in September, which saw 86% of dollar bonds trading lower following a mixed July and August. Investors saw a solid $44.5bn wiped out from dollar bonds during the quarter, calculated as the mark-to-market loss based on the percentage change in bond prices multiplied by the amount outstanding.
While the net move in the 10Y US Treasury was only about 6bp from the beginning of the quarter, the months of July and early August saw its yield drop to almost 1.15% from 1.47% end-June. Moreover, after the Fed sounded hawkish in its September FOMC meeting with tapering on the cards, the 10Y yield jumped ~12bp on a single day with bonds across the spectrum falling. During the month, the 10Y yield was up 22bp. Besides the macro backdrop, the global impact of Evergrande and the China property market added to further negative pressure across markets.
For those of you who are late to the Evergrande party, fret not. We have put together an interactive dashboard on the Evergrande saga with the latest news, bond prices, timeline of events, rating actions and key financials. You can access the dashboard via the link below:
By rating category, investment grade (IG) rated dollar bonds underperformed high yield (HY) dollar bonds in our universe during Q3. 74.4% of IG dollar bonds ended the quarter lower. The box and whisker charts below plot the price return (ex-coupon) of dollar bonds in our universe – by credit rating. The horizontal line inside each of the boxes indicates the median price return, while the box area above and below it represents the upper and lower quartile respectively. The dots that fall above and below the bounds are outliers with each dot representing a bond.
While the vast majority of the IG universe traded lower, one prominent outlier stands out – China Huarong. Huarong’s dollar bonds staged a solid recovery, up 15-30% in Q3 after Beijing stepped in to offer a $7.7bn bailout for the distressed asset manager. This recovery was almost symmetrical to the fall in its dollar bonds in Q2 when they fell 10-35%. Among the prominent losers were Indonesia’s longest tenor dollar bond, its 3.35% 2071s that lost 7.6% during the quarter. This was followed by IG rated Chinese developers Shimao, Country Garden and Sino-Ocean whose bonds fell 5-7% in Q3.
73.3% of high yield (HY) dollar bonds in our universe delivered a negative price return ex-coupon in Q3 with majority of the outliers on the downside coming from the Chinese real estate space. Among the HY gainers were Huarong’s perps that rallied 40-60% following the bailout. Another name in the green was China Fortune Land Development (CFLD) whose bonds traded higher as restructuring talks progressed. This comes after the company defaulted on its bond payments in February this year.
The rather long list of losers were dominated by Chinese property developers Evergrande, Fantasia, Golden Wheel, Sinic, R&F Properties (Easy Tactic), China South City, Kaisa, Central China Real Estate (CCRE), Ronshine and Greenland. More on these names in the top gainers & losers section lower down.
Chinese Property Developers' Bonds - Spread Widening & Rating Changes
Given the Evergrande crisis and its ripple effects on the overall Chinese real estate sector during Q3, we saw many developers’ dollar bonds take a beating. This was coupled with a series of credit rating downgrades, which pushed bond prices of those developers even lower. In the table below, we have plotted the median Z-Spread widening of high yield rated Chinese developers’ dollar bonds against each developers’ rating – at the start and end of the third quarter.
Global corporate dollar issuance volume for Q3 stood at $304bn vs. $376bn for Q2 and $440bn for Q1. The quarter’s volumes were down 24% vs. Q3 2020. For the month of September, issuance volumes stood at $133.9bn vs. $92.4bn in August and 20% lower than last September's issuance of $167.7bn.
APAC (ex-Japan) & Middle East G3 issuances stood at $98.04bn in Q3 vs $142bn in Q2 and $152bn in Q1. Issuances during Q3 2021 was the lowest quarterly issuance since Q4 2019 which saw $97.5bn in issuances. The quarter’s volumes were down 26% vs. that of Q3 2020 which was at $133bn. The region’s issuance volume for September stood at $45bn, 3x that of August and 17% lower than September 2020's issuances of $54.4bn. Issuances picked up in the region during the first half of the month post which the primary market went quiet due to the Evergrande crisis.
Looking at new bond deals in Q3 across industries, banks led the table with over $32.8bn in issuances with ICBC raising a massive $6.16bn via 3.2% PerpNC5, the largest AT1 deal globally since 2017. Financial Services, Energy and Sovereigns followed with $22bn in issuances with several large deals (scroll to the largest deals section). In terms of returns since issuance, Real Estate unsurprisingly topped the losers list, down 3.8% on average, while Transportation and Logistics led the gainers, up 0.8%. A similar pattern was observed in the APAC & Middle East region too, with the Real Estate sector faring worse, returns since issuance down over 4%.
Largest New Bond Deals
ICBC's $6.16bn Perp was both, the largest single AT1 issuance and global issuance during the quarter. That was followed by banks dominating the table with Morgan Stanley's $6.5bn two-part issuance, KfW's $5bn deal, Mitsubishi's $4.1bn dual-trancher and Goldman's $4bn deal. With regard to sovereign's Hungary led the table with a $4.25bn two-part deal while Egypt also raised $3bn via a dual-trancher.
In the APAC & Middle East region, Q3 began with Qatar Petroleum's $12.5bn jumbo four-trancher, the largest overall deal, followed by Nigeria's $4bn three-trancher, Abu Dhabi's $3bn two-part issuance, Egypt's $3bn triple-trancher and Philippines' $2.25bn issuance. A good part of the large issuances during the quarter came in the month of September after August saw a lull with only $15.2bn in deals across the region.
Top Gainers & Losers - Global and APAC & ME
For the quarter ended September, while the top gainers were a mixed bag, the top losers list was dominated by Chinese names - particularly those operating in the real estate space. The top gainer across the global and APAC & ME list was China Huarong's 4.25% Perp, which rallied a solid 61% to end the quarter at 84.7 cents on the dollar, yielding 8.9%, after state-owned CITIC Group stepped in to offer a $7.7bn bailout for the distressed asset manager. The losers were led by the company of the hour, China Evergrande, which is currently undergoing a grave liquidity crisis with a series of credit rating downgrades, missed coupon payments and pressure from Beijing to offload assets. Its 13% bonds due 2022 led the losses, losing a staggering 79% of its value during the quarter to currently trade a 17.8 cents on the dollar. For comprehensive coverage of Evergrande including the latest news, timelines and charts, click on the link below:
Ripple effects were seen in other property developers' dollar bonds with names such as Sinic, Fantasia, Golden Wheel, Rongxingda, Central China, R&F Properties (Easy Tactic), RiseSun, Ronshine and Yango among the top losers falling ~30-75% during the quarter. Sinic's $246mn 9.5% bonds due next month on October 18 fell off a cliff, down 35 points to ~57 cents on September 17 after Fitch changed its outlook on the developer to negative while its B+ rating in the week prior. Shortly thereafter, Sinic was downgraded first by S&P to CCC and then by Moody's to Caa2 with both citing liquidity concerns, leading to another massive round of selling to now trading at 22.5 cents on the dollar.
Fantasia too faced a series of downgrades starting with Fitch cutting it to B on September 16, followed by Moody's downgrading the developer to B3 on September 27 citing refinancing risks. Golden Wheel on the other had saw its dollar bonds slipping in the days leading up to its earnings release on September 29 when it reported a sharp 89% drop in gross profits. Central China (CCRE) also saw its bonds trending lower after it released 1H earnings on August 20, reporting its net debt ratio soaring to a massive 92.6% in 1H2021 from 13.6% a year ago. R&F's bonds slipped after it was downgraded by Moody's to B2 - its 11.625% bonds due 2024 fell to ~50 cents on the dollar. The bonds recovered soon after when R&F announced a $1bn equity infusion and a $1.55bn sale of its property management unit to investment grade rated peer Country Garden.