China Real Estate - Is there a contagion effect?
?China Evergrande has been the center of attention in the last few weeks as investors and creditors alike fear a potential default. Moody’s Analytics Early Warning System shows that the China real estate crisis is actually more widespread, and risk spillovers are impacting other key players.
?Top 10 riskiest real estate companies in China as of October 2021
In the wake of Fantasia Holding $206M bond principal repayment default, the Early Warning System shows the company’s credit risk as measured by the 1-Yr Expected Default Frequency (EDF), increase at a much faster rate than other China real estate companies. Fantasia’s EDF has historically been risky (in-line with the 75th percentile EDF of its peer group), but since the beginning of year rose and eventually breached the top 90th percentile of riskiest companies in the China real estate group in Mar 2021.
?Fantasia’s EDF vs Peers
?The EWS also helps bond investors anticipate other credit events such as rating downgrades. The below chart shows Fantasia’s one notch downgrade from B3 to Caa1 on Sep 28th 2021. Looking at the Deterioration Probability (blue line), we are able to anticipate the risk of downgrade and see the deterioration probability increases rapidly.
?Whilst a robust EWS can help you anticipate risk in your portfolio and take the necessary preventive actions to mitigate risk, it can also concurrently ascertain the safer entities within a given industry, establishing investment opportunities.
Top 10 safest real estate companies in China as of October 2021