HONG KONG - A surge in junk-rated bonds has made Chinese borrowers more aggressive, with select ones succeeding in cutting their costs for repaying bonds early, a change from standard practice that worries some investors and bankers.After a tumultuous 2018 in which many borrowers were shut out from the market and yields spiked dramatically over fears of steadily rising U.S. interest rates, the market floodgates have reopened this year.
Investors do not like bonds to be redeemed early as they expect a steady return from the coupon until maturity. “We would expect at least half the coupon being used as a way to compensate the bondholder for being called,” said Stephen Chang, Hong Kong-based executive vice president and portfolio manager at Pimco.
Times China Holdings, also in property development, is another borrower that got better terms for potential early repayment. It sold a three-year bond with a coupon of 7.625 percent that could be redeemed after two years at just 101 percent of par value.While it is natural for borrowers to try to extract more favorable terms when there’s hefty demand to buy bonds, bankers say the lowering of call prices is a newer development.
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