China’s Property Crisis Has Investors in Green Bonds Seeing Red – The Wall Street Journal

China’s Property Crisis Has Investors in Green Bonds Seeing Red  The Wall Street JournalChina’s Property Crisis Has Investors in Green Bonds Seeing Red  The Wall Street JournalChina’s Property Crisis Has Investors in Green Bonds Seeing Red  The Wall Street Journal

The Shanghai Kaisa Financial Center. In December, Kaisa failed to repay the sustainable bonds it had issued one year ago.
Photo: Qilai Shen/Bloomberg News

Developers had issued green bonds before the Chinese property sector was in trouble. They were among the most prolific corporate issuers within this rapidly-growing area of global finance. The recent selloff in China’s real-estate-bond market and a string if defaults have caused a steep drop in the prices of many of these sustainable or green bonds in dollar. These bonds are used to finance social or environmentally friendly projects. Creditors have suffered huge losses. Many of these securities are now trading at less than 30c…

Developers had issued green bonds before the Chinese property sector was in trouble. They were among the most prolific corporate issuers of this fast-growing segment of global finance.
However, the recent selloff in China’s real-estate-bond market and a string if defaults have hurt prices for many of these sustainable or green bonds in dollar. These bonds are used to finance social or environmentally friendly projects. Creditors have suffered huge losses. Many of the securities are now trading at below 30 cents per dollar, which indicates deep doubt among investors that they will ever get back their original value.

China’s developers face a complex mix of government borrowing restrictions, falling home sales, and low sentiment among investors and home buyers. The rapid growth in environmental debt markets has opened up a new funding channel to an already highly leveraged industry.
Jeff Klingelhofer (co-head of investments at Thornburg Investment Management) stated that many investors have been too quick “to focus on the open-ended idea of green benefits” instead of focusing on the borrower’s overall creditworthiness.
He said that green bonds are still scarce and attract large inflows. This means that issuers are often able tap the market in more turbulent periods and at attractive yields.
Chinese property companies sold green-bonds at a faster rate than the global market, which was booming. Dealogic data shows that Chinese property companies issued $9.6 trillion worth of green dollars bonds in 2021, an increase of $2.5 billion from the previous year. The global sales of these bonds by non-financial corporations grew to $64 billion, from $29 billion during the same period.

The boom worked for a while in everyone’s favor. The bonds gave a greener look to an industry that takes up land and uses materials like concrete, steel, and glass. The money would be used to fund projects such as energy-efficiency improvements, reducing emissions, and the introduction of recycling facilities.
Investors in Asia welcomed the deals, stating that the extra volume was helping to expand a market that had been behind those in Europe and the U.S. and which had previously been largely based on green bonds from Chinese banks.
Demand was often large: Sinic Holdings Group Co. sold its first green bond in January 2021. This company, which had single-B credit ratings and was considered risky, often due to high demand. Sinic was able to reduce the coupon on the bond from a higher-than-planned 9.125% because of the orders placed by investors for the $250 million note.
An investor who purchased green bonds from Chinese property developers Cifi Holdings Group (Co.) Co.
Zhenro Properties Group Ltd.
He said that he bought them because he was more familiar with the businesses and their business practices than because of green-bond goals. He said that transparency would be a benefit to the sector.

Sinic sold its first green bonds in January 2021.
Photo: alex plavevski/EPA/Shutterstock

The situation has changed dramatically in the last few months as China’s property companies have been experiencing increasing financial stress. Many bond issuers tied to sustainability, environmental, and governance (ESG), have defaulted on dollar debt. Shenzhen-based ESG bonds are just one example.
Kaisa Group Holdings Ltd.,
The December payment of $400 million of 6.5% sustainable bonds issued one year earlier was not repaid by the company.

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Kaisa, one the largest offshore borrowers of China’s real estate companies after
China Evergrande Group,
The company has hired financial advisors to help it restructure its $11.8 billion worth of bonds. Kaisa’s smaller peers who have issued ESG bonds such as Sinic and Modern Land China Co., also defaulted.
Others include
Yuzhou Group Holdings Co.
And
Yango Group Co.
They have attempted to alleviate their financial problems by negotiating so-called distressed bond exchanges with holders some of their dollar bonds. Rating agencies consider this a form of default and have helped to lower the prices of their international debts, including green bonds.
A little over a year ago Yuzhou, a junk rating, was able sell $562 million worth of green bonds due 2027. Investors were offered a slender 6.35% coupon. Tradeweb reports that these bonds were recently offered at 21.5 cents per dollar.
Frances Yoon can be reached at frances.yoon@wsj.com

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