Distressed-Debt Funds Have Lost Big on China Property Bets

livemint.com:

China’s property market meltdown created a multibillion-dollar opportunity for distressed-debt investors. It hasn’t paid off. The country’s real-estate sector is reeling from a yearslong slowdown that has put strains on the economy, sparked widespread protests and triggered defaults on around $81 billion of Chinese developers’ international bonds between 2021 and 2022, according to figures from S&P Global Ratings.

The wave of defaults in the sector proved irresistible to many distressed-debt funds. These funds buy the bonds or loans of struggling companies, often at a price well below face value, and negotiate with the companies to work out a debt restructuring plan. They flooded into the market two years ago, including buying many of the outstanding bonds of developers China Evergrande Group, KWG Group and China Aoyuan Group, according to a Hong Kong-based trader.

But the distressed-debt playbook isn’t working in China. Dozens of Chinese property companies have defaulted on their bonds over the last two years, but only a handful have paid investors back any money. Last month, Evergrande abandoned a $35 billion debt restructuring plan that it had finally agreed with some of its investors after protracted negotiations.

China Aoyuan still hasn’t completed a deal more than 18 months after it defaulted. Most dollar bonds sold by Chinese property companies are trading below 10 cents on the dollar, and several are trading at less than 5 cents, according to research firm CreditSights. “The market is showing all the signs that it’s lost patience," said Jean-Charles Sambor, head of emerging markets fixed income at BNP Asset Management.