As onshore markets returned from a week-long holiday, bonds and shares issued by Chinese developers fell, with minor signs as to how regulators plan to prevent the contagion from cash-strapped China Evergrande Group's financial woes.
Evergrande, whose stock has been frozen since it requested a trading suspension on Monday pending the announcement of a significant transaction, is grappling with more than $300 billion in debt and is facing one of the country's greatest defaults.
The corporation skipped coupon payments on two dollar bond tranches last month, and three more will be due early next week, totaling over $150 million. The potential failure of one of China's top debtors has sparked concerns about contagion risks in the country's property market, as its debt-ridden peers face rating downgrades due to impending defaults.
Over China's National Day holiday, this uncertainty harmed bonds issued by property companies such as Kaisa Group, Central China Real Estate, and Greenland.
Onshore bonds caught up to the selling on Friday. After major shareholder Fantasia Holdings Group missed the deadline on a $206 million international market debt payment on Monday, the Shanghai Stock Exchange froze trade of two bonds issued by smaller developer Fantasia Group China Co, with one falling more than 50%.
"A default by a small business is usually seen as a one-off event. Market investors are wondering if this is a prelude to voluntary defaults by other developers with solid short-term liquidity positions but big unsustainable longer-term debt, according to Chang Wei Liang, Credit & FX Strategist at DBS Bank.
In a statement on Thursday evening, Fantasia Group said that its activities were regular and that it was in close contact with investors. "Actively promoting debt service protection measures," it added.
Xiamen Yuzhou Grand Future Real Estate Development, Yango Group, and Guangzhou R&F Properties all had their onshore bonds fall on Friday.
After another of its onshore bonds sank more than 7.5 percent in morning trade, China Aoyuan Group announced in a statement on Friday that it had deposited funds for the payment of an onshore bond maturing Oct. 12.
Concerns about Evergrande's contagion impacted mainland share prices as well, with an index tracking the property sector down 1.75 percent in afternoon trade, compared to a 1% gain for blue-chip stocks.
The Hang Seng Property and Construction index dropped more than 0.6 percent in Hong Kong, compared to a 0.1 percent loss in the broader Hang Seng index.
According to Bloomberg, advisers have asked several dollar bondholders on a call on Friday at 0630 EST (1030 GMT) to discuss strategy and broaden the group.
According to a source familiar with the situation, Evergrande dollar-bond trustee Citi has recruited law firm Mayer Brown as counsel. Citi and Mayer Brown did not respond to requests for comment.
In September, two sources familiar with the situation stated that a group of bondholders had previously chosen investment bank Moelis & Co and law firm Kirkland & Ellis as consultants on a prospective bond restructuring.
During the week-long holiday beginning Oct. 1, Chinese regulators made no specific comments on Evergrande. However, the central bank last Wednesday urged financial institutions to work with relevant departments and local governments to maintain the "stable and healthy" development of the property market and protect housing consumers' interests.
The state-run Global Times said late Thursday that authorities' adherence to the "three red lines" debt ceilings showed that "China has its own set of priorities and maintains the focus on deflating the real estate bubble and reducing risks."
After the company requested a pause in trading its shares in Hong Kong on Monday pending an announcement about a big deal, investors had been waiting to hear from the company. Evergrande Property Services Group, a spin-off that went public last year, also requested a suspension, citing "a possible general offer for the company's shares."
While selling assets might temporarily alleviate Evergrande's cash flow concerns, analysts believe Evergrande's and other Chinese property businesses' indebtedness is too high to be rectified fast.
An index of China's high-yield debt, dominated by developer issuers, fell all week and touched its lowest level in more than five years on Friday morning. It's possible that spreads could soon be the biggest they've ever been.