China Builders Weaken Debt Safeguards as Investors Chase Yield

The senior covenant officer at Moody’s Investors Service has been cautioning for years that Chinese property developers are using their dominance of the Asian dollar debt market to borrow money from bondholders on looser terms. It’s a trend that shows no sign of going away: the average covenant quality score for property firms fell to the weakest last quarter since Moody’s began compiling the figures in 2011. But a blistering 10% return on Asian junk bonds in the first half, of which Chinese real-estate firms account for a majority, saw investors take whatever they could get, with new deals underpinned by record order book sizes. That’s storing up risks on Chinese developer notes that may be getting closer to materializing, thanks to a surge in yuan volatility and curbs on financing that are behind an uptick in defaults.