While the issuance of USD high-yield bonds has been lethargic globally since early 2022 amid rising rates, the decline in APAC (ex-Japan) has been very much caused locally, and very much by one specific sector: mainland China property. Conversely, that has been a boon for restructuring advisory work.

As shown in the table below – powered by Debtwire’s Restructuring and Primary Issuance databases – new HY USD issuance volume in the region collapsed in late-2021, just as large Chinese developers began missing payments on their offshore bonds. The sector’s impact on volume has been outsized largely because it has long been the main provider of APAC USD HY bonds.

Surveying the damage

The wave of offshore bond defaults, which formed in mid-2021, crested in the middle of 2022 and has yet to recede. So far, 53 Chinese property companies have been subsumed in the surge, and behemoth homebuilder Country Garden Holdings will be the 54th if it doesn’t cure two missed 7 August bond coupons by the end of a 30-day grace period.

This has dried up demand for Chinese property bonds. Debtwire data shows that non-investment grade Chinese property companies currently have 397 offshore public bonds outstanding with aggregate principal value of USD 154.9bn. They have so far lost more than USD 135.5bn of their market value mostly in the past two years. That is based on 25 August prices from IHS Markit, which covers 367 (includes three CNH and five HKD-denominated tranches) of these tranches with USD 152.9bn outstanding, and cumulatively marks them at a total value of only USD 17.3bn – or 11.3% of the principal outstanding.

Dollar bond issuance dries up

The unprecedented distress in the Chinese property sector has eliminated the key pillar of the USD bond market in APAC (see chart above). For the six months ended June 2023, only USD 3.5bn high yield bonds were issued in APAC, of which one tranche was from a China property developer – Seazen Group‘s May issuance of a USD 100m due-2024 bond. Overall, the region’s USD high yield issuance in 2023 is on pace to be even lower than a disastrous 2022, which had the lowest annual issuance volume in a decade.

The issuance of APAC (ex-Japan) USD HY bonds had increased significantly, if bumpily, throughout the 2010s, and peaked in 2019, when more than USD 120bn was priced. The growth from 2017 was powered predominantly by the Chinese property sector; it contributed USD 69bn in 2019 or 55% of the total APAC figure, up from USD 7bn/19% in 2016.

Prelude to the tempest

The sector’s offshore bond issuance spree was part of its debt-raising binge that eventually prompted the central government to force developers to deleverage. It was this policy push – not the underlying property market – that triggered the tsunami of defaults.

Indeed, after a sharp but short slump during the early days of COVID-19, contracted sales among high-yield bond-issuing Chinese property developers staged a furious rally.

Data in Debtwire’s monthly China Property Pre-sales Tracker shows that, in 2020, there was a 10.9% YoY increase in aggregate contracted sales by the 53 high yield bond issuing developers that reported comparative figures for that year. Then the 52 developers with comparative data for 1H21 reported an aggregate 34.6% YoY increase for that half. Contracted sales only began to fall sharply in 2H21 and have continued to plummet since then.

Restructuring advisor opportunities

While the carnage in the Chinese property sector has left homes unfinished, and DCM bankers with little to do, it’s been a boon for restructuring professionals in the region. As the chart below shows, Chinese property companies have accounted for the vast majority of new restructurings in APAC since 3Q21, as measured by debt amount.

While the total number of new mandates for restructurings involving Chinese property companies has come down in the last few quarters, the sector remains a bountiful source of advisory fees – and headaches. As the chart below shows, 22 Chinese property companies that are currently engaged in a workout process appointed advisors more than one year ago, while another eight are beyond the six-month mark.

Completed Restructurings

Since the current property downturn began in July 2021, 31 developers have completed 39 restructuring processes covering 101 offshore-bond tranches with USD 32.2bn principal (see table below).

Biggest Winners

Four financial advisors – Haitong International, Alvarez & Marsal, Admiralty Harbour and Guotai Junan International – have each received more than 10 restructuring advisory mandates by Chinese property companies or their stakeholders since the start of 2021.

Among international law firms, Sidley Austin leads the pack, with 31 appointments, followed by Linklaters, with 21. Both parlayed their dominance in advising on HY issuance in the region.

A potential government led by Argentina libertarian presidential candidate Javier Milei would have difficulty governing with a minority in Congress, according to two credit research analysts, a source close to the IMF, and a bondholder. However, the main opposition party, Juntos por el Cambio, would likely support the passage of several of Milei’s policies, they said.

“If Milei were to repeat Argentina’s primary results in the general elections, his libertarian party would gain 40 seats in Congress and eight seats in the Senate, but without institutional muscle and winning any governors, it would be challenging for him to pass any reforms in his campaign platform,” Pedro Siaba Serrate, head of research and strategy at the Argentine portfolio managing firm PPI, told Debtwire.

However, Milei’s La Libertad Avanza party could form a coalition with Juntos por el Cambio, which would have 107 seats in Congress and 27 seats in the Senate if the primary results were to hold, enough for the coalition to have a majority in Congress, according to a PPI report. Argentina has 257 members of congress and 72 senators.

“Under the most optimistic scenario, Milei could use the Juntos por el Cambio governing structure to implement policies in the Senate, as they would have a majority in both chambers. I think this could eventually happen.” Siabe Serrate said.

Recently, Milei has toned down his campaign platform after winning the primaries with 30% of the votes, with the general elections scheduled for 22 October. In TV interviews since the primaries, he has said that the dollarization of Argentina’s monetary system wouldn’t occur from one day to the next, that dissolving the Central Bank wouldn’t be done immediately, nor would lifting currency controls.

“If we aren’t able to eliminate the Central Bank via political channels, we will put even more pressure on cutting the budget to lower inflation,” Milei said today during a conference for the Council of the Americas in Buenos Aires.

Abolishing the Central Bank, if implemented, would prove deeply unpopular, according to a bondholder involved in Argentina’s previous debt restructuring negotiations.

Milei sometimes simplifies concepts to communicate them to society better, a source close to his campaign explained. When he says he will eliminate the central bank, this is not something he plans to do immediately or in an irresponsible way. The candidate is not even considering lifting FX restrictions from one day to the next and knows there is a hyperinflation risk if he does that. He plans to do these things sequentially and reasonably, the source close to the campaign said.

A representative for the La Libertad Avanza party did not respond to a request for comment.

“The issue is whether Milei will be able to govern or not,” said Andres Borenstein, an economist at the Econviews consultancy in Buenos Aires. “Milei has no governors and would hold only 10-15% of Congress. It will be very difficult to pass laws. If it were difficult for [former president Mauricio] Macri to govern when his party held a third of Congress, Milei would have less than a half of that.”

“The market is going to be very anxious until the general elections, and the upside that the Argentine sovereign debt — which was viewed as very cheap — will now be on hold until the general election results,” Borenstein said.

Argentina’s USD 20.5bn 3.625% bond due 2035 traded at 29.9 on 14 August compared to 26.4 on 15 June, according to MarketAxess. The USD 10.5bn 3.5% bond due 2041 traded at 31.4 on 14 August compared to 28.5 on 15 June.

Rule by Decree

Previous Argentine presidents have issued executive decrees that allow them to dictate laws without needing a majority in Congress. Its use is only prohibited for criminal, electoral, and tax legislation. At least one of the chambers of Congress must approve a decree for it to be valid, according to the legal framework for decrees (Law 26.122).

Former President Cristina Kirchner issued a decree to intervene in the previously privately owned oil firm YPF when initiating its expropriation in 2012. She also issued a decree in 2010 to remove Central Bank president Martin Redrado from his position after he opposed using the bank’s reserves to pay for public debt. Macri issued decrees during his administration, which never had a majority in either chamber, to establish foreign exchange controls, fix fuel prices, and renegotiate public debt.

“I think it could be similar to the situation faced by the previous [Macri] administration, a scenario in which Milei has the support of Juntos por el Cambio with reforms. I think there are a lot of coincidences between the two parties. If there are difficulties, they can advance with decrees. Milei also mentioned doing a referendum,” Martin Castellano, Head of LatAm Research at the Institute of International Finance (IIF), said.

Milei could get support to reform the government’s public finances, maybe including a privatization program. Castellano said. The fiscal issues will be where most of the focus is, but it isn’t easy to implement. “But I think he could work with the main opposition party and get support to implement it. It is important to maintain investor confidence and keep working with the IMF given their role as the country’s main creditor,” Castellano said.

Milei’s economic team had a more collaborative attitude with the IMF during meetings last week, being more in favor of the current government receiving financing from the IMF so there can be a smooth transition, Argentina’s economy minister Sergio Massa said during a press conference 23 August.

Milei would advocate for harsher budget cuts than what the IMF is asking for, he said in an interview with television station TN.

Although the “fund continues to be the fund,” the IMF sees things differently now, a source close to Argentina’s delegation to the IMF told Debtwire. The IMF knows that a sharp adjustment creates a decline in production and a smaller tax base, meaning a continued deficit without being able to pay the debt. It understands if Argentina adjusts too much, the country won’t grow, and its tax base will decline, preventing Argentina from paying its debt service, this source said.

Another issue is the proposed privatizations of YPF and state-owned airline Aerolineas Argentina, which Libertad Avanza’s candidate for mayor of the City of Buenos Aires, Ramiro Marra, assured would be implemented in an interview with TV station C5N on 23 August.

“YPF is also a company that we need to privatize because it has clearly been used for party politics,” Marra said. On the other hand, he said that for Aerolineas Argentina, the party is working on a plan for employees to administer the company.

“It would be challenging for Libertad Avanza to privatize the 51% of YPF that is state-owned,” a source close to the IDB told Argentina. “By law, it would require a two-thirds majority in Congress, and I don’t think that would be easy to do.”

“Some of Milei’s ideas could be very good if implemented, but the market will judge you on the probabilities of execution and whether they will be well-executed,” Siaba Serrate said.

Argentina’s primary presidential election concluded with an unexpected three-thirds scenario led by libertarian candidate Javier Milei, increasing uncertainty regarding who could become the country’s next president, according to political and market analysts consulted by Debtwire.

With fewer campaign resources, Milei “managed to be heard by the population” and secured 30.04% of votes, outperforming the main political coalitions, said a source close to Javier Milei’s La Libertad Avanza campaign team.

Main opposition coalition Juntos por el Cambio obtained 28.27% of votes, and ruling party Union por la Patria, 27.27%, according to the latest results provided by Argentina’s Electoral Direction.

The primaries’ result was deemed an “earthquake” by political analyst Sergio Berenzstein, during a Zoom discussion this morning with Argentine portfolio managing firm PPI. Milei’s results were “amazing” even in provinces where he spent zero resources campaigning. It is similar to what happened in Brazil with [Jair] Bolsonaro and in Mexico with [Andres] Lopez Obrador,” he said.

However, the scenario is still open ahead of the 22 October general elections, according to Berenzstein. It is yet to be seen whether Milei will be able to consolidate his results, considering the slim difference he obtained compared with the main political forces, and the fact that in the general election there will likely be around 5% or 6% more voters than in the primaries, the analyst said.

The Juntos coalition, which was seen by a majority of polls as the leading contender in the primaries, had “its worst election since it was created” in 2015, said Berensztein. They lost a lot of support, but it is true that in the past they have managed to improve their results in general elections versus their results in the primaries, he said. It is yet to be seen if Patricia Bullrich, who was elected as the coalition’s candidate for Juntos over contender Horacio Rodriguez Larreta, can increase her support to around 35% and make it to the runoff, said the analyst.

“It was a victory of antipolitics,” said a source from the Juntos campaign team. “Milei is an expression of Argentines’ disappointment and anger, but we need to find a way to deliver the message that he cannot replace politics and institutions,” the source said.

The ruling coalition Union por la Patria, with candidate Sergio Massa, also emerged weakened in these primaries, said the Juntos source. More than 60% of Argentines voted against them and in favor of right-wing policies and a less interventionist view, the source said.

“Milei’s performance in the primaries is likely going to improve in October,” said an Argentine portfolio manager following the matter. “If he doesn’t make too many mistakes, he will probably grow amid the new enthusiasm and as voters now see him as a competitive candidate,” the source said.

On the contrary, the ruling party will have to navigate two months of financial instability that would probably weaken it, while Bullrich will have to face a tough campaign with one opponent on her right and the other to her left, the portfolio manager said.

Fear of the unknown    

Argentina’s sovereign bonds traded negatively Monday after the primaries results, with global bond prices plummeting 10% on average, according to a second portfolio manager. “While Milei clearly proposes pro-market policies, investors are showing fear of the unknown,” the trader said.

The libertarian candidate’s government plan includes a reform of the tax, labor and pension systems, the privatization of loss-making public companies, the elimination of the Central Bank and a dollarization of the economy, among others.

“Abolishing the Central Bank and dollarizing the economy will be huge endeavors considering Milei’s probably limited support in Congress,” said Hans Humes, the CEO of Greylock Capital Management.

“Dollarization is a legitimate issue to discuss for a country that has had the currency weakness Argentina has. Abolishing the Central Bank and all the Health, Education and Environment ministries, if implemented, would prove deeply unpopular,” he stated.

While Bullrich and Milei (to an extent) speak of economic plans that traditionally appeal to the financial community, the whipsaw of change in political direction could be very disruptive, said Humes. Markets like stability, continuity and predictability, he said.

The market can see that “the next few months will be really difficult for Argentina after the primaries’ results,” said a fixed-income trader. “We will have more inflation, more poverty, before any policies to correct macro imbalances can be applied,” the fixed-income trader said. While very good years can come with a new administration, the transition may be turbulent, the fixed-income trader said.

“Argentinians overwhelmingly favored the most forceful right-leaning opposition factions in the primary,” Martin Castellano, head of LatAm Research at the Institute of International Finance, posted on his X account. “While Milei’s proposals could trigger concerns, the election outcome enables much-needed policy changes. Asset prices should react favorably despite the tough transition ahead,” he stated.

Disputes inside Argentina’s (CCC-/C) main political coalitions, Frente de Todos (FdT) and Juntos, have left them at the brink of fracturing, just before the 14 June deadline to register for the 22 October presidential elections, three sources familiar with the matter said.

There is a chance that ruling coalition FdT ceases to exist due to the conflicts between President Alberto Fernandez and the factions led by Vice President Cristina Kirchner and by Minister of the Economy Sergio Massa, the first and second sources said. Massa and Kirchner are said to be negotiating in the last couple of weeks to form a new coalition that will present a single presidential platform for the primaries. President Fernandez is not part of these negotiations, the sources said.

Former governor of the province of Buenos Aires, Daniel Scioli, as well as Cabinet Chief Agustin Rossi, both close to Alberto Fernandez, have expressed their intentions to run in the 13 August presidential primaries and they refuse to withdraw their candidacies to negotiate a consensus presidential platform for FdT, as Kirchner and Massa want, said the first source. The situation has become “impossible, with nobody willing to capitulate,” the source said.

“The truth is that FdT does not have a candidate that is strong enough to gather the entire coalition’s consensus,” said the second source. Other potential candidates in the FdT coalition include Massa, Minister of Domestic Affairs Eduardo de Pedro and social leader Juan Grabois, according to local press reports. All of them have voting intentions of around 15% and fail to capture the 25%-30% core support that Cristina Kirchner is able to gather, the second source said. Kirchner has announced she won’t run for president.

Similarly, the Juntos coalition is divided between a faction supporting Patricia Bullrich and the group that backs Horacio Rodriguez Larreta, said the second and third sources. Rodriguez Larreta is willing to broaden the coalition with the incorporation of other political forces, such as the Federal Peronism of Cordoba’s governor Juan Schiaretti, but Bullrich and former president Mauricio Macri are against this strategy, the second source said. Conflict inside Juntos has escalated rapidly this week due to this issue, the source said.

Nonetheless, “chances of a breakup in Juntos are minimal,” said the third source. Macri and Bullrich are working to avoid that and this week they have accepted Larreta’s suggestion to incorporate Jose Luis Espert, from the libertarian party, to Juntos, in an effort to wind down confrontation levels, the third source stated.

The only one benefitting from these disputes in FdT and Juntos is La Libertad Avanza candidate Javier Milei, said the second source. “Argentines are angry and disappointed with politicians and these conflicts for power only reinforce their willingness to bet for the anti-system alternative,” the source said.

The most recent poll of consultancy firm Aresco shows Juntos with a 29.1% voting intention, followed by La Libertad Avanza with 27.6% and leaving FdT in third place with a 27.4% voting intention. Measured by candidate, for the Juntos coalition Bullrich obtains 14.7%, while Larreta gets 14.4%, according to the Aresco poll. For FdT, Eduardo De Pedro gets 15.8% and Scioli, 11.6%, said the report.

De Pedro is seen as Kirchner’s favorite candidate, even though the vice president has not yet said who she will support, said the second source. Another recent poll, from consultancy firm Analogias, shows FdT with a 27.5% voting intention, followed by Juntos with 26.8% and La Libertad Avanza with 21.2%.

Coalitions will have to register to participate in this year’s presidential elections by 14 June, and they will have to present the candidates that will run in the primaries by 24 June. The primaries will be held on 13 August and the general elections, on 22 October. Presidential debates are scheduled for 1 and 8 October. A runoff, in case it is needed, is expected for 19 November.

Spokespeople for President Fernandez and Sergio Massa did not reply to requests for comment. Spokespeople for Patricia Bullrich and Horacio Rodriguez Larreta declined to comment.

Mid-market lenders are using a position of relative strength in a risk-off environment to hit back at over-engineered EBITDA adjustments that were the norm in dealmaking barely a year ago.

The global pandemic ushered in widely accepted operational cost – and synergy-adjustments to EBITDA calculations as sponsor-led deals flourished. But now, amid increased interest rates, rising macro-economic uncertainty and a dearth of deals, lenders hope to soften the blow by both curtailing leverage and the EBITDA it is ultimately based on.

With fewer deals and less cherry-picking available to all, financiers are reining in control on EBITDA hard caps, which are expressed as a percentage of EBITDA prior to relevant adjustments. Where previously 25% of EBITDA was acceptable, now lenders are willing to swallow only 10%–20%, market participants have said.

The inclusion of some cost savings and synergies will still be permitted but not all cost control, restructuring and operational improvements will make the cut.

“Vendors are scaling back EBITDA exceptionals. There are clearer caps that we are seeing with banks and funds. Both are coming back to 10%; 20%, at the maximum, is what they will reasonably accept,” one European lender said. “They (vendors) can’t do anything with an adjusted and real EBITDA that are too far apart. They have woken up.”

Sectors that have been hit particularly hard include healthcare, favoured by investors on both sides of the aisle. Large swaths of adjustments related to cost synergies vendors hoped to achieve in some uncertain future based on a buy-and-build strategy, sources noted.

More broadly, buy-and-build cases required lenders to take a leap of faith on reaching the proposed adjusted version of EBITDA in some uncertain future, sources said.

“People have realised that there is a lot of nonsense, particularly in their portfolio, let’s say with credits from around 2021,” a financier at a major European bank said. “I think experience and circumstances are making it clear that it can’t go on like this.”

A case in point is the ongoing sale of German RFID-specialist Elatec, where the vendor broke out adjustments to the EBITDA amounting to less than EUR 200,000, a source familiar with the situation said. Leverage pitches on the business landed at around 4.75x with the jury out on structuring earnings as forward looking FY23 EBITDA was projected to reach EUR 26.9m, a 50% increase on last year’s reported figure, as reported.

An auction for UK’s dentistry chain Clyde Munro was parked in March by sponsor Synova as the financing environment remained challenging, as reported by Debtwire sister publication Mergermarket. Here, too, lenders were structuring off GBP 5m of EBITDA and scaling back adjustments related to synergies from potential acquisitions: a far cry from the GBP 10m it was being marketed off.

The sale of Rad-x hit a snag late last year with aggressive EBITDA adjustments related to a buy-and-build plan that didn’t reflect its actual performance, as reported. Many sponsor buyers backed out of the process to acquire the Gilde Healthcare-backed German radiology business, as it was marketed off EUR 25m to EUR 30m of EBITDA while its real EBITDA lay closer to EUR 13 to EUR 15m.

“The equity people will assume they will achieve everything they say they are going to achieve,” a European debt investor said. “That is their upside, but the debt guys will be more cautious and assume that they won’t achieve all of what they are saying and structure the leverage off a lower EBITDA number.”

Lenders are unlikely to push back on tangible adjustments such as those related to a factory closure, reducing headcount or restructuring-related operational cost reductions, the debt investor noted. It gets trickier when synergy costs related to future benefits get spun out.

“This is often where we start to say ‘hang on, no, not really. Two years is a long time. I don’t know if you will be able to fully realise this,’” the investor noted.

Those same adjustments also won’t be accepted on an unreasonable time scale. “It was common to see that people were allowed to use the adjustment for 18 months – sometimes even 24 months – this is almost certainly now back to 12 months,” another mid-market direct lender noted.