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China’s Junk Bonds Are Suddenly the World’s Hottest Credit Trade


(Bloomberg) — Editor’s Note: Welcome to Credit Weekly, where Bloomberg’s global team of reporters will catch you up on the hottest stories of the past week while also offering you a peek into what to expect in credit markets for the days ahead.

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As the meltdown of China’s property sector pushed developers into default and drove the prices of their bonds to pennies on the dollar, hedge funds and other buyers of troubled assets swooped in to make a bet that Beijing would ultimately step in to stem the crisis.

The wager is starting to pay off big.

After a series of policy steps to ease strains in the nation’s property market, bonds of China’s developers have been surging.

An index of dollar-denominated junk bonds in China that’s brimming with developer debt is up 6.5% so far this month and more than 32% the past three months. That beats every other major bond benchmark in the world, Bloomberg index data show.

The rally is likely to mean significant gains for the funds that stuck with the trade, even as those holding defaulted debt — like that of China Evergrande Group — continue to wait for restructuring plans to be hammered out.

The price rebound is also starting to have some real impact for borrowers. A unit of Dalian Wanda Group Co.’s property arm returned to the bond market this week after a 16-month absence, selling $400 million of US dollar bonds, Bloomberg’s Wei Zhou reported.

The cost was steep with an 11% coupon and a discounted price that pushed the all-in yield to 12.375%. But the company pulled it off without a state guarantee or having to mortgage the company’s crown jewels, a sign that capital markets may be beginning to stir again for the more creditworthy borrowers.

Elsewhere:

  • Financial institutions spurred the busiest week ever in Europe’s bond market as they prepare to repay cheap pandemic-era loans from the European Central Bank.

  • Credit-grading firms are growing more concerned about companies that borrowed in the US leveraged loan market. Loans to junk-rated companies have in recent months been getting downgraded at the fastest pace since the pandemic. For more about the troubles in the market, read Bloomberg’s Big Take.

  • Just weeks after the BOJ’s policy tweak, two Japanese companies scrapped plans for yen bond sales. Orient Corp. skipped a sale after investors asked for higher premiums than it was prepared to pay. Tohoku Electric Power cited internal reasons for a delayed offering and is due to return to the market in coming days.

  • Trading in US mortgage bonds plunged in 2022 as new mortgage lending volume dropped and banks cut back on buying, a trend that’s likely to continue this year if mortgage rates stay relatively high.

  • Caretakers of bankrupt crypto exchange FTX are offering some hope for those betting on recoveries after finding more than $5 billion in cash or crypto assets that it may be able to sell to help repay creditors.

  • Bed Bath & Beyond Inc. is speaking with potential lenders that would finance the retailer during bankruptcy proceedings and has held discussions for a potential stalking-horse bid in which the party would also offer to buy some or all of the company’s assets in bankruptcy, Bloomberg News reported. Among those in talks to buy assets in bankruptcy is private equity firm Sycamore Partners, the New York Times reported.

–With assistance from James Crombie, Wei Zhou, Michael Gambale, Paul Cohen and Catherine Bosley.

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©2023 Bloomberg L.P.



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