The Bonds That Cried Major Default Risk – The Wall Street Journal

The villagers in “The Boy Who Cried Wolf,” bored of their shepherd boy’s constant false alarms, refuse to come to his aid when a wolf finally does appear. There may be a lesson in the fable for investors in Chinese property giant Evergrande and the country’s real-estate market more broadly.

Heavily leveraged Evergrande is in the midst of yet another financial squeeze. The company announced Sunday and Monday that it has recently sold almost $1 billion of holdings in two companies—internet services firm HengTen Networks and smaller real-estate developer China Calxon. Fitch Ratings cut Evergrande’s credit rating Tuesday from B+ to B, noting the company’s seemingly limited access to capital markets and growing dependence on less stable shadow-banking loans.

The current wobble has been unfolding for three weeks: It began when regulators started examining the relationship between Evergrande and Shengjing Bank, a regional lender in which the property developer has built a large stake.

Evergrande’s March 2022 bond currently yields a little over 20%, up from as low as 8.6% in late May. And the company’s share price is down almost 30% year-to-date, making it one of the few companies anywhere trading at the depressed levels of March 2020.

Close watchers of Evergrande can rightly say that it is not the company’s first financial tremor. Nor is it its second or third. Spikes in the company’s bond yields are relatively common. Optimists note that after a $1.5 billion bond maturing on June 28, it has no offshore bonds due for the rest of the year.