Kaisa scare spreads to top-rated Chinese borrowers as costs of credit jump

(Bloomberg) - The surge in borrowing costs for Chinese junk bond issuers is spreading to investment-grade companies amid the nation's corruption campaign and following missed payments by property developer Kaisa Group Holdings.

The average spread at issuance on US dollar-denominated notes from China sold since Jan. 1 and rated investment grade has leapt to 259 basis points from 207 in the second half of last year, data compiled by Bloomberg show. Corporate securities from China in the U.S. currency have lost 0.45 per cent this year. Only debt from Bangladesh, Mongolia and Sri Lankan companies have lost more among emerging Asian countries, JPMorgan Chase & Co. indexes showed.

Concerns are mounting that even China's best-rated companies may get caught up in government probes as President Xi Jinping targets both "tigers and flies" in his anti-graft drive. In the highest profile cases, at least seven officials have been removed at China National Petroleum Corp. including the former chairman Zhou Yongkang, a previous member of the party's Politburo Standing Committee in charge of domestic security.

"The China premium used to be close to nothing when compared to the developed names globally," said Raymond Chia, head of credit research in Asia ex-Japan for Schroder Investment Management. "But now, with the corruption clampdown which makes the government the locksmith, as well as the commodity price impact, investors are having a more careful look at Chinese names."

Kaisa, whose bonds are listed in Singapore, is being investigated by the Chinese government for dealings with official Jiang Zunyu, who's been under a probe since October, people familiar with the matter said Jan. 13. Jiang had served as party chief of Longgang district, where some approval procedures for Kaisa projects were suspended last month.

The builder failed to make an interest payment due Jan. 8 on US$500 million of 10.25 per cent dollar bonds before getting a waiver on a HK$400 million loan from HSBC Holdings Plc. The notes slid 40 per cent last month as some projects were blocked and founder Kwok Ying Shing quit, reaching a low of 29.9 cents on the dollar Jan. 7.

Speculative grade Chinese notes fell 3.9 per cent this year, a Bank of America Merrill Lynch index shows.

The cost of protecting against a default of the Chinese government touched the highest in nine months on Jan. 19 and was still at 89 basis points Thursday, a level almost 50 per cent higher than that paid to hedge South Korean risk, according to credit default swap prices. China has an AA- rating from Standard & Poor's, one notch higher than Korea.

"Our main concern now is not knowing which corporates could be next in the Chinese government's cross-hairs," said Brigitte Posch, the London-based head of emerging market corporate debt at Babson Capital Management. "The political risk element is no longer to be relegated to background noise at a macro level."

Foreign investors face the possibility of steep losses because Chinese courts don't recognize judgments obtained in foreign courts, although exceptions may be made for Turkey and Italy where the governments have mutual treaties, according to Hong Kong-based restructuring advisers Mayer Brown JSM.