Our view on Sunac’s default and its implications for the China property sector.
On May 11, Sunac, the fourth largest developer in China, defaulted as it missed a coupon payment on its offshore dollar bonds. In contrast, it extended the maturity of its onshore bond that matured in April. Sunac bond prices were relatively stable at approximately $20 as the default had mostly been priced in. Even with the reduced cash flow needs, the liquidity crunch for Sunac is likely to continue in the near term given its sharp decline in contracted sales and the slow progress of its asset disposals.
The latest CPI print suggests that the Fed could continue on an aggressive tightening path.
The Consumer Price Index (CPI) rose more than forecasted in April on both a headline and core basis. On a headline basis, CPI rose 0.3% month-over-month and 8.3% year-over-year, while Core CPI (which excludes food and energy) rose 0.6% MoM and 6.2% YoY. Wednesday’s strong inflation print highlights persisting inflationary pressures that continue to weigh on households, and are likely to force the Federal Reserve to continue on its path of aggressive rate hikes to quell elevated levels of inflation.
We explore the importance of active management in the European high yield market.
In the first four months of the year, European high yield credit spreads widened 104 basis points, approximately 35%, to reach 465bps. The sector’s underperformance to the more domestically skewed U.S. high yield market has been noteworthy, if not unsurprising, given the unfortunate events that have unfolded in Europe.
Reviewing spread performance on a sectoral basis, our analysis shows limited divergence between pro-cyclical and non-cyclical sectors (38% widening vs. 34%, respectively) but, as ever...
Regardless of whether we get a hard or soft landing, we likely face a steep approach to the runway in trying to “land this plane.” The question is, how well consumers and companies absorb the slowdown, and whether sentiment is already bearish enough to create long-term value.
Recent spread-widening appears to reflect concern about rising rates incentivizing extensions, and an economic slowdown incentivizing coupon deferrals—concerns we regard as significantly overstated and a source of attractive valuations.