November 10, 2021
☀️ Good morning!
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⏱ Today's Smart Brevity count is 1,213 words, 5 minutes.
1 big thing: China's homebuilders are on the brink
Since China Evergrande began flaking on debt payments in September, the world’s focus has turned from whether its collapse represents a Lehman Brothers-like moment of systemic peril (it doesn’t) — to whether China’s whole property sector is set for a string of defaults (it probably is).
Why it matters: Lehman or not, the Federal Reserve warned this week that financial fallout from China’s real estate shakeout “could pose some risks to the U.S. financial system.”
Driving the news: At least four Chinese housing developers have formally entered default for not making interest or principal payments on their dollar bonds, the WSJ reports.
The big picture: China’s government thinks developers took on way too much debt, and last year ordered domestic banks to tighten lending standards.
- Yes, but: Those lenders thawed after the Chinese central bank last month made comments that appeared to ask them to loosen up credit to prevent a property sector meltdown.
- A key meeting of the Chinese Communist Party, known as the sixth plenum, is taking place this week. Watch for whether top party officials publicly support the sector or discuss extending credit to it.
State of play: A slew of developers borrowed money in the offshore dollar-denominated bond market — but recent investor aversion has led to a massive selloff.
- Many high yield bonds issued by China-based property developers now trade at pennies on the dollar, and average yields are over 25%, per the WSJ.
- In the next two months, a hefty lineup of developers' bonds are scheduled for repayment, Aayush Sonthalia, portfolio manager for emerging markets debt at PGIM Fixed Income, tells Axios.
- “Every morning when we start the workday, the focus is on what coupons or maturities came due … and how low the bonds are trading today,” he says.
Between the lines: The trading levels make it all but impossible for these companies to refinance in the offshore market. No investor will fund new debt at 100 cents on the dollar when they could just buy similar bonds at 60 cents or lower in the secondary market.
Zoom in: Evergrande may have made a few 11th-hour interest payments, but it’s still expected to go through a debt restructuring (three more payments due Wednesday appear in doubt, Reuters reports).
- "It's headed for a default. They paid the [previous] coupons in order to buy some goodwill, and to avoid a completely unstructured default," Sonthalia adds.
The bottom line: The sector is in for a reckoning, but contagion hasn't spread to other areas of the global bond markets.
- Case in point: JPMorgan analysts forecast that the emerging market corporate bond default rate (excluding China and Argentina) will be just 1.1% in 2022, which is not too far off their forecasts for U.S. and European default rates.
2. Catch up quick
A government report forecasts an oversupply of oil next year, cooling expectations for the White House to draw from its Strategic Petroleum Reserve. (Bloomberg)
The Department of Justice is preparing to go after companies for wrongdoing, in a crackdown aimed at following through on the Biden administration’s pledge to take a tougher stance on corporate misbehavior than the Trump administration did. (FT)
Rivian Automotive priced its IPO at $78 per share, valuing the company at $77 billion — considerably higher than initially expected. The electric vehicle maker, which still generates substantial losses, plans to launch three vehicles later this year. (WSJ)
Bonus chart: Tesla's wild ride
Tesla shares fell 12% Tuesday — nearly putting its market cap back under $1 trillion less than two weeks after it entered the exclusive trillion-dollar club.
- The company shed over $150 billion in value since its peak last Thursday, according to FactSet.
The reason for the slide? It could be a company filing with the SEC that showed Elon Musk's brother, Kimbal Musk, dumped shares on Friday — the day before the Tesla chief launched a Twitter poll asking his followers if he should sell some of his stake.
- It could also have to do with the mounting expectations that Elon Musk will monetize some of his holdings.
- Insider reported Tuesday that the Tesla CEO may need to sell shares to service his personal loans.
The bottom line: “The stock is extremely overvalued from a long-term perspective, and investors are struggling with the valuation,” Tudor, Pickering, Holt & Co. analyst Matt Portillo told Bloomberg. The stock-sale poll was an excuse for investors to pull back, he said.
3. Charted: Half a billion credit cards
The number of credit cards in America hit an all-time high of 520 million in the third quarter of this year, per the New York Fed's household debt and credit report, released Tuesday, writes Axios' Felix Salmon.
Why it matters: There was a precipitous plunge of more than 100 million credit cards between 2008 and 2010, but we’ve now more than made up for that decline.
- Buy now, pay later companies like Affirm aren't included in this tally — they're still too small to merit their own line in the report.
- Household debt now totals more than $15 trillion, of which $800 billion is in credit cards, and another $1.4 trillion is in auto loans.
What they're saying: "Issuance to borrowers of all scores returned to, or even surpassed, pre-pandemic levels," wrote Fed researchers on the Liberty Street Economics blog.
- "These issuances have real consequences for borrowers and borrowing. Borrowers with newly opened credit card accounts have typically seen an average balance increase of $645 in that month."
The bottom line: If you thought the pandemic was going to trigger a big reduction in Americans’ debts, turns out you were wrong. We seem to be gearing up for more consumer borrowing than ever.
4. Big business sharpens attack on Build Back Better
Business groups are sharpening their attacks on President Biden's Build Back Better package, warning congressional Democrats about its overall costs, potential effects on inflation and $800 billion in corporate tax increases, Axios' Hans Nichols writes.
Why it matters: The White House relied on some of these same groups — like the Chamber of Commerce and Business Roundtable — to pass the $1.2 trillion bipartisan infrastructure bill.
- Corporate America now wants to pocket that win and try to kill any tax increases to pay for Biden's $1.75 trillion social and climate spending package.
- That's exactly what progressive lawmakers feared all along.
- "We are fighting against the reconciliation bill because it’s bad for the economy and bad for business,” Neil Bradley, the Chamber's chief policy officer, told Axios. “We fought for the infrastructure bill because it was good for the economy and good for business.”
5. Coal's export revival
Coal is experiencing a mini U.S. rebound thanks to higher prices for natural gas both domestically and in key global markets, Axios' Ben Geman writes.
Driving the news: U.S. coal exports are 29% higher this year, the Energy Information Administration said in its monthly outlook Tuesday.
- And coal consumption in the U.S. power sector is slated to be 18% percent higher.
Yes, but: EIA notes that coal-fired power has not increased as much in response to gas prices as in the past, due to lower supplies and stockpiles.
The big picture: Coal, the most CO2-intensive fuel, once provided over half of U.S. power but has bled market share to gas and renewables over the last decade.
- It fell to 20% of total U.S. generation last year but is reviving to 23% this year, per EIA.
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