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China developers: record junk yields keep pushing limits

Credit rating agencies continue to push Chinese developers into the junk pile, while rating cuts continue. Other companies, previously not perceived as high risk, are surprising the markets with bad news leading to another debt crisis. This signals that taxi defaults are coming.

The Logan Group, which operates leading residential and commercial properties in the Gulf of China, including Shenzhen, was downgraded to CCC by S&P Global Ratings on Friday. She noted a rescheduling of her land debt plus the amount of her large debt repayments. Peer Times China has also been downgraded by Fitch. Shares of both companies have fallen more than 80% in the past year.

Logan has a serious crisis with about $ 1 billion worth of bonds repaying this year, no less than its market value. She promised private placement notes in a similar amount, which she may now have to repay. Its three-year dollar bond fell to 13 cents on the dollar on Friday from 95 cents in December.

This drop highlights a recent trend in the Chinese asset sector. Even developers who otherwise did not show any signs of credit problems caught sudden twists and turns for the worse. The past week has been a record for Chinese bonds in junk dollars, as the average yield peaked at 26%. According to Bloomberg data, more than half of all beach bills with a high yield of local developers are traded below 50 cents on the dollar.

This sale is not excessive. Markets may underestimate the unknown debts held by these asset groups, which may outweigh the risks seen in the available financial statements. These hidden debts include collateral loans. Developers may borrow from trustworthy companies after exhausting their bank lines of credit. Of the Rmb16tn ($ 2.5tn) investments made by Chinese mutual funds, more than a tenth went into real estate last year.

Just when real estate entrepreneurs in China may have thought the worst was happening, collapses in local junk bond prices signal that more difficult times lie ahead.

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