Big default scares give investors whiplash

C hina’s biggest default scares of 2019 have taken bondholders on some wild rides, underscoring both the risks and the opportunities for investors as more of the nation’s companies struggle to repay debt.

At least three large Chinese borrowers — Qinghai Provincial Investment Group Co., China Minsheng Investment Group Corp. and Beijing Orient Landscape & Environment Co. — missed bond-payment deadlines last month only to come up with the cash shortly thereafter. A fourth issuer, Hong Kong Airlines Ltd., saw its dollar bonds plunge on repayment concerns in January but made good on a maturing note after reportedly securing help from China Development Bank.

In all four cases, knee-jerk declines in the firms’ bonds gave way to at least partial recoveries. Dollar notes issued by Hong Kong Airlines have rallied 45 per cent from their lows and CMIG’S have gained 13 per cent.

While many bond investors would rather avoid such volatility, some buyers of distressed debt welcome it. Taking advantage of the turbulence requires acting fast in illiquid markets, making the right call on borrowers’ ability to repay, and — in some cases — determining the Chinese government’s willingness to intervene. That’s no easy task amid an uncertain economic outlook and mixed messages from authorities on bailouts.

“Price volatility in distressed names does bring investment opportunities,” said Gary Zhou, Hong Kong-based fixed-income director at China Securities International. “But they are more likely to be grasped by specialized distressed fund managers who follow those names very closely.”