Wednesday, June 19, 2024
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JPMorgan raised its global emerging markets corporate high-yield default forecast, largely due to rising contagion fears in China’s property sector from a possible Country Garden default. 

The U.S.-based investment bank raised its 2023 global forecast to 9.7% from 6% in a note dated Aug. 15. It also raised its Asia high-yield default rate forecast to 10% from 4.1% — that figure drops to just 1% if China property is excluded. JPMorgan expects China property to account for nearly 40% of all default volumes in 2023, followed by 35% from Russian corporates and 12% from Brazilian issuers.

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The magnitude of the increase in JPMorgan’s default risk assessment underscores fears that a Country Garden debt default will have a far broader ripple effect on the Chinese property sector and the broader economy. Country Garden has a far bigger and broader portfolio of developments than China Evergrande Group which fell into default in 2021 and announced an offshore debt restructuring program in March.

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Country Garden, which used to be one of China’s largest developers, has until early September to make coupon payments it missed Aug. 7 on two dollar notes. Last week, it also suspended trading in 11 domestic bonds and issued a warning that it expects to post a half-year annualized loss of up to 55 billion yuan ($7.5 billion).

On the same note, JPMorgan said a Country Garden default could add $9.9 billion to the year-to-date global emerging markets high-yield corporate default tally, taking the total default volume for the Chinese property sector to $17 billion to date in 2023.

JPMorgan estimates a Country Garden default could also lead to $8 billion worth of defaults among remaining smaller Chinese property developers and another $2 billion for “some liability management exercise” from a spillover to other Chinese high-yield sectors.

Over $100 billion of China property bonded debt has defaulted over the past two and a half years, according to JPMorgan. Prior to Country Garden, China’s property sector already chalked up $109 billion in defaults since the beginning of 2021, which is 94% of total defaults in Asia during that period.

JPMorgan also raised its default rate forecast for Latin America to 7.1% from 6.6% after Brazil’s Odebrecht Engenharia e Construcao appears to be embarking on another round of debt restructuring that could affect $1.9 billion in dollar-denominated bonds.

The bank raised its default forecast for emerging Europe to 23.4% from 15.7%, to reflect the inclusion of Russian corporate bond defaults, which were mostly “technical” since sanctions from Russia’s war in Ukraine prevented firms from getting bond payments to international investors.

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