Funds managed by BlackRock and HSBC added to their holdings of Evergrande bonds just months before a liquidity crisis at the Chinese property developer pushed it to the brink of default.
BlackRock in August bought up five different Evergrande dollar bonds through one of its high-yield funds, which had holdings in the developer then worth $18m, Morningstar data show. The size of the holding had already expanded sharply this year as the fund’s assets under management rose.
The world’s biggest asset manager had total exposure of close to $400m across its funds, according to data compiled by Bloomberg based on June, July and September filing dates.
A HSBC-run high yield fund in July was also a net buyer of Evergrande’s debt and has increased bond holdings by 38 per cent since February as the fund expanded in size, the Morningstar data showed, though the value of its total exposure at $31m declined over that period due to falling prices.
The data highlight a willingness on the part of some of the biggest investors in Evergrande’s offshore bonds to continue to add to their holdings even after prices had started falling in the earlier stages of a liquidity crisis that is now rippling across international markets.
Numerous investors are likely to have at least some exposure to Evergrande, as its bonds are a large component of indices that track dollar-denominated Asian company debt. The group’s debt traded on offshore markets accounts for only a small proportion of its wider $300bn in obligations to creditors and businesses, meaning the exposure these asset managers have more broadly remains limited.
BlackRock declined to comment on its investment in Evergrande’s debt. HSBC’s asset management unit said, “as with many sectors we invest in, we closely monitor developments in the real estate sector”.
The bonds of the world’s most indebted property developer have for weeks traded at highly distressed levels as it seeks to stave off a default on interest payments it owes on Thursday on its offshore bonds. A dollar-denominated bond maturing next year is trading at below 30 cents on the dollar, compared to close to its face value in late May.
S&P Global Ratings expects the company to default this week and estimates it has close to $20bn in dollar-denominated bonds outstanding from two offshore subsidiaries.
Ashmore, the emerging market investment specialist, had the highest exposure with more than $400m of its bonds as of the end of June, Bloomberg-compiled data showed, while UBS had close to $300m of exposure to Evergrande bonds as of the end of April, May, June and July. UBS and Ashmore declined to comment.
In a note to clients last week, UBS said: “We continue to hold Evergrande in fixed maturity funds because exiting the position at this point removes any optionality around a successful resumption in construction activity, external financial assistance, or policy adjustment in the coming months, and Evergrande bonds are now trading at or below typical historical recovery values”.
Evergrande is the best-known international borrower across China’s real estate developers, a highly-leveraged sector that has relied heavily on Asian dollar bond markets over the past decade but is now under pressure from Beijing to reduce its debts.
Earlier this summer investors ramped up their bets against Evergrande bonds as prices began to tumble on waves of bad news, including frozen deposits and the halting of projects by local authorities, followed by angry retail investors descending on its Shenzhen headquarters last week.
The company has long attracted market scrutiny for its debt load, which is the largest of any property developer in the world.
“I have forbidden anyone [that works for me] from touching Evergrande equity or debt for 20 years,” said the chief executive of a private equity fund in Hong Kong. “It has always been obvious that it is super high risk and one day it would all end suddenly in tears”.