by Neil Unmack via Reuters Breakingviews
Is China Evergrande another Lehman Brothers moment? Not at all, according to the $40 trillion global corporate debt market. International credit investors have good reasons to be so nonchalant about the potential ripple effects of problems at the Chinese property behemoth with a $300 billion debt pile.
Granted, Evergrande’s slow-motion crash has had some impact. As the group’s 2025 dollar bonds have collapsed to trade at a mere 30% of face value, the riskier end of China’s debt market has suffered. The average yield on dollar bonds issued by junk-rated Chinese companies has doubled to around 16% since the start of the year, according to an ICE Bank of America index. And safe-haven U.S. bonds rallied on Monday when global stock markets wobbled.
But those ripple effects look contained. In the United States, where some $19 billion of Evergrande bonds are issued, the average extra yield that investors demand to own junk-rated debt is steady at roughly 310 basis points, another ICE Bank of America index shows. That’s even lower than the levels seen in the heady days of September 2006. And the yield spread on bonds issued by U.S. and European investment-grade companies are below levels seen in late 2007, the year before the collapse of Lehman Brothers.
This makes sense. Western government bond yields are still low and below market expectations of future inflation. Investors need to take risks if they don’t want to see price rises erode their returns.
New Covid-19 variants or a Chinese property meltdown could hurt the global economic recovery. But companies have emerged from the pandemic in good health having raised cash, cut costs and skimped on investment in the past 18 months. European companies’ debt has fallen to 2.3 times trailing EBITDA and that multiple could sink as low as 2 times by year-end, its lowest since before the Lehman collapse in 2008, Citi analysts reckon. Meanwhile, Moody’s is forecasting a global corporate default rate of just 1.7% year-end, less than half the historic average
Resilience could prove to be an Achilles heel. Persistent demand for corporate debt will keep borrowing costs low, which may tempt more companies to gear up to finance shareholder payouts. That, however, will be a problem for another year.
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