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Shares fall to lowest level in 5 years as payment deadline looms for debt-laden developer

Shares in Chinese and Hong Kong property groups fell to their lowest levels in half a decade as an escalating liquidity crisis at developer Evergrande showed signs of spreading beyond the sector.

Evergrande, the world’s most indebted property developer, faces obligations of more than $300bn to creditors and other businesses and a crucial interest payment deadline on its offshore bonds on Thursday.

The company’s Hong Kong-listed shares fell as much as 18.9 per cent on Monday. The drop underscored concerns about the broader health of China’s real estate sector and triggered a wider sell-off, sending the Hang Seng Property index, which tracks a dozen listed developers, down almost 7 per cent, to its lowest level since 2016.

Hong Kong’s broader Hang Seng index fell 3.7 per cent, taking the benchmark down almost 12 per cent for the year.

Evergrande, whose share price has tumbled since it warned of the risk of default last month, said senior executives would suffer “severe punishment” after securing early redemptions on investment products it later told retail investors that it could not repay on time.

Trading in Hong Kong indicated that the deepening fears for the property sector were dragging on other developers and financial institutions. The real estate industry, which accounts for more than a quarter of China’s economic activity, has come under pressure to reduce debt.

“Evergrande is just the tip of the iceberg,” said Louis Tse, managing director at Wealthy Securities, a Hong Kong-based brokerage. Chinese developers were under substantial repayment pressure on dollar-denominated bonds, he added, while markets had become nervous that Beijing would push listed real estate groups to cut the costs of housing in mainland China and Hong Kong.

“That affects the banks as well — if you have lower property prices what happens to their mortgages?” Tse said. “It has a chain effect.”

Shares in Ping An, China’s biggest insurer, fell as much as 8.4 per cent on Monday, after closing down 5 per cent on Friday as it was forced to disclose that it held no exposure to Evergrande debt or equity. Ping An has Rmb63.1bn ($9.8bn) of exposure to the country’s real estate stocks across its Rmb3.8tn of insurance funds.

The insurer took a $3.2bn hit in the first half of the year after the default of China Fortune Land Development, a developer that specialises in industrial parks in the northern Hebei province.

Other Chinese developers including Fantasia Group, which was downgraded last week by Fitch, the rating agency and Guangzhou R&F, have also been under pressure over recent weeks. On Friday, Reuters reported Beijing had told Hong Kong’s property tycoons in closed-door meetings to do more to ease the city’s chronic housing shortage.

Signs of a slowdown across China’s property sector have also hit iron ore prices, which reached a record this year but slumped last week after markets digested the impact of government curbs on steel production.

On Monday, iron ore futures in Singapore fell as much as 11.5 per cent to below $100 a tonne for the first time in over a year. Iron ore prices had tumbled 20 per cent last week, their worst weekly performance since the financial crisis in 2008.

Exchanges in mainland China were closed for a public holiday, but FTSE China A50 index futures traded in Singapore fell as much as 4.3 per cent.

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S&P -0.88% Nasdaq -0.70% EuroStoxx -1.15% FTSE -0.61% Dax -1.30% SMI -0.72%

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Capital raising will help airline cancel element of package received from Berlin at height of pandemic

Lufthansa is to raise more than €2.1bn by offering new shares to investors, the German carrier said on Sunday, and use the proceeds to repay the multibillion-euro bailout it received from Berlin in the summer of 2020.

The long-anticipated capital raising, underwritten by 14 banks and due to be completed in early October, will help the Frankfurt-based airline refund the full €2.5bn it has drawn from its home country’s Economic Stabilisation Fund (ESF) by the end of the year, the group added.

Germany’s ESF participated in a €9bn rescue package for Lufthansa last summer, which included support from the Austrian, Swiss, Italian and Belgian governments. Berlin also spent €300m on shares in the company, and now owns almost 16 per cent of the group.

Lufthansa has repaid much of what it drew from the package, including a €1bn loan from the German development bank KfW.

Once the ESF tranche is fully repaid, the airline will cancel the facility in its entirety, before repaying the €1.2bn it owes to the remaining governments, a spokesperson said.

“We have always made it clear that we will only retain the stabilisation package for as long as it is necessary,” said chief executive Carsten Spohr. “We can now fully focus on the further transformation of the Lufthansa Group.”

After being forced to ground almost all its planes at the height of the pandemic, the group has been slowly recovering, with flights in August reaching 50 per cent of those flown in the same month in 2019.

Lufthansa said it expected a similar percentage in September and October, as demand for international and corporate travel increases, and added it was currently flying to 85 per cent of its pre-pandemic destinations.

Its cargo business has been booming in recent months, as freight capacity in the bellies of passenger aeroplanes remains restricted amid a surge in demand for air deliveries as online shopping continues to be popular.

While it is still burning through roughly €200m a month in cash, Lufthansa said it expected to have no operating cash drain in the third quarter, and for earnings before interest, taxes, depreciation and amortisation to turn positive for the first time since the pandemic broke out.

The group, which is aiming to return to overall profitability in 2024, also expects to take delivery of up to 30 new aircraft per year in the future.

Higher bills will hurt consumers and threaten the region’s post-pandemic economic recovery

Soaring energy prices will push up broader inflation across Europe this year, hurting consumers and threatening the region’s post-pandemic economic recovery, economists are warning.

Benchmark European gas prices have already tripled this year, even before peak winter demand kicks in. Norway’s Equinor, one of Europe’s biggest gas suppliers, said last week that high energy prices could last well into 2022 and warned of possible price spikes.

“Brace for a surge in eurozone gas inflation,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. Rising energy prices will drive “an acceleration in the eurozone’s headline inflation,” added Daniel Kral, economist at Oxford Economics.

There are multiple reasons behind the price surge, from low European energy stocks and US storms that curbed Texas gas exports, to rebounding demand as economies reopen. Climate change policies that seek to incorporate the rising price of carbon have also had an effect.

The eurozone’s consumer price index for energy has already risen to its highest level since records began in 1996. In August, its 15.4 annual per cent increase, the series’ biggest jump since the global financial crisis, pushed the eurozone’s headline inflation rate to a decade high of 3 per cent.

That is well above the European Central Bank’s 2 per cent inflation target. But ECB officials and economists have said they expect the rise to be temporary, because of one-off factors such as supply chain disruptions, as the developed world emerges from the pandemic.

Even so, a prolonged rise in energy prices could derail those inflation forecasts. Higher energy bills would also hit household budgets and consumer confidence, threatening economic recovery.

It “would act as an effective tax increase on households . . . reducing their discretionary outlays and slowing Europe’s recovery, which has largely been driven by the rebound in consumer spending,” said Nick Andrews, analyst at Gavekal, an investment research group.

Energy accounts for almost 10 per cent of consumer spending in Europe, so “the double-digit yearly increase of energy prices . . . is having an important effect,” said Peter Vanden Houte, ING’s chief economist.

The impact of higher energy prices goes beyond the EU. In August, the annual rate of energy price inflation rose by more than 60 per cent in Norway, topped 20 per cent in Canada and the US, and registered double-digit increases in South Korea, Chile and Mexico.

It has had ripple effects on other commodities, pushing up the price of oil and potentially food. It has also prompted governments to react.

Last week, Spain announced a €3bn raid on energy companies’ profits. Italy’s government has already spent about €1.2bn to subsidise consumer bills. Some EU lawmakers have also called for an investigation into whether Russian gas exporter Gazprom manipulated gas prices.

Alexei Miller, head of Gazprom, said on Friday that low stocks could force European gas prices to new highs through the winter, according to state-run Tass newswire.

On top of that the price of carbon permits, a central plank in EU plans to slash emissions, has almost doubled this year. This “suggests that energy bills will be higher in the future,” Jessica Hinds, economist at Capital Economics, said.

The immediate inflationary impact of higher energy prices is all but unarguable. Barclays economist Silvia Ardagna estimated it could push up headline eurozone inflation to a peak of 4.3 per cent this November.

Whether that will lead to higher core inflation — a measure which strips out volatile energy and food prices and which the ECB watches when gauging whether to change monetary policy — is another matter.

“Higher energy inflation alone won’t push the ECB,” Vistesen said.

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Nor will higher energy prices necessarily lead to slower overall growth because high household savings accumulated during lockdown could leave consumer spending power largely unaffected.

The recovery in employment, as reflected in high job vacancies, could also help. “We are not making any change to our growth outlook at this time,” Ardagna said.

Still, high energy costs will with little doubt be a problem for many, whether those are less well-off individuals or companies for which energy is an important input.

“A cold snap at the start of winter is now a real economic threat, for low income households and some manufacturing sectors,” Vistesen said.

Junk-Debt Sales Soar Toward Record Year

Issuance of bonds and loans from companies with speculative-grade credit ratings has already hit a one-year high

U.S. companies including Crocs Inc. CROX -1.67% and SeaWorld Entertainment Inc. SEAS -1.10% have sold more than $786 billion of junk-rated bonds and loans so far in 2021, according to S&P Global Market Intelligence’s S&P. That tops the previous high for a full year in data going back to 2008.

The record issuance marks a notable rebound from March 2020, when investors’ worries about widespread bankruptcies and defaults sent prices for low-rated debt slumping. Now, low interest rates and a stimulus-fueled economic rebound that has supported companies with weaker credit ratings have boosted the appeal of riskier debt.

Junk bonds and so-called leveraged loans are typically issued by companies with significant debt relative to their earnings, making them more sensitive to the economy’s trajectory. Economists surveyed by The Wall Street Journal expect the U.S. to grow around 6% this year and 3% in 2022.

Analysts and investors expect bond and loan sales to each set full-year records. With rates low, companies are taking advantage of investors’ demand to refinance higher-cost debt, lowering their interest costs and pushing off repayment.

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In the junk-bond market alone, U.S. companies have issued more than $361 billion of bonds with speculative-grade credit ratings through Sept. 14, according to S&P Global Market Intelligence’s LCD. That is the second-most junk bonds ever sold in a single year and on pace to surpass 2020’s $435 billion record, analysts say.

Even if U.S. growth has peaked, any expansion should still support junk bonds, said Mark Durbiano, senior portfolio manager and head of high yield at Federated Hermes, which manages more than $645 billion in assets. He is recommending that clients hold more junk bonds than benchmarks.

Mr. Durbiano’s funds have targeted newly issued bonds with triple-C ratings—the lowest level before default—believing that some companies will see their ratings upgraded as the economy continues to recover.

“There are very strong and improving credit conditions,” he said. “You’ve already seen it, and we think you’re going to see it continue.”

Junk bonds have returned more than 4.9% to investors this year through Wednesday, counting interest payments and price changes, according to LCD. Leveraged loans, which have interest rates that rise and fall with their benchmark, have returned 4.2%. Both beat the 0.05% total return on investment-grade corporate bonds and minus 1.4% for Treasurys. Triple-C-rated bonds have gained almost 10%.

The rally in junk debt marks one sign of investors’ retreating worries about the recent jump in inflation, which erodes the purchasing power of bonds’ fixed payments and can drive the Federal Reserve to raise interest rates. The consumer-price index spiked above average yields on junk bonds earlier this year, upending the conventional logic of investing in bonds, which are typically prized for protecting investors’ money.

The retreating worries have helped a record amount of new companies to enter the junk-bond market for the first time this year. Cryptocurrency exchange Coinbase Global Inc. COIN 0.81% made its market debut this past week and excess purchase orders helped it borrow extra money while lowering its interest costs.

Other companies, sometimes backed by private-equity sponsors, are issuing low-rated bonds to pay for mergers and acquisitions, a key source of new market supply. ASP Unifrax Holdings Inc., a maker of specialty fiber products and inorganic materials owned by Clearlake Capital, sold $1.2 billion of single-B and triple-C-plus rated bonds this month to fund its purchase of Lydall Inc.

The company’s lower-rated, $400 million note due 2029 recently traded at 104.250 cents on the dollar, implying a yield of 6.491%.

The extra yield, or spread, that investors demand to hold an ICE BofA index of junk bonds over Treasurys recently stood at 3.03 percentage points above Treasurys, when adjusted for options. That is just above this year’s low of 3.02 percentage points hit in early July—the lowest level since July 2007.

Many companies have been using recent sales to extend the maturity on their debt, which lowers the yearly interest burden. The number of leveraged loans coming due between 2021 and 2023 fell to $56 billion, according to LCD, out of around $1.3 trillion outstanding. More than $80 billion of loan sales this year have been tied to deals meant to amend credit documents and extend maturities—the second-highest yearly total in data going back to 2012.

Signs that the pace of the U.S. economic recovery is slowing could still spark volatility in the near term, analysts said. Spreads tend to widen after economic growth and survey data peaks, according to a recent Deutsche Bank note.

Deutsche Bank analysts expect any short-term increase in junk-bond spreads to moderate by year-end and finish the year at 3.23 percentage points.

“This is still likely to be one of the lowest periods for spread volatility on record and will continue to help support the relative appeal of high yield to investors,” they wrote.