(Bloomberg) -- Institutional investors including BlackRock Inc. and UBS Group AG are set to become key players in the latest test of global bondholders’ negotiating power when Chinese companies run into trouble. 

The two firms are among the five-largest holders of dollar bonds sold by Sunac China Holdings Ltd., the latest property firm to default, according to Bloomberg-compiled data based on filings as recent as mid-May. BlackRock and UBS declined to comment.

Based on recent filings, other holders of Sunac’s offshore debt have included HSBC Holdings Plc, Allianz SE’s Pacific Management Investment Co. and Ashmore Group Plc. The filings don’t necessarily reflect current holdings as some of these may have changed since the documents were filed, and firms may hold bonds on behalf of clients. Rules on how funds disclose their holdings vary by country. 

Representatives for Allianz, HSBC, Ashmore, abrdn plc, Value Partners Group Ltd., Neuberger Berman Group LLC and Fidelity International declined to comment. Prudential Plc said its overall exposure to the China property sector is “de minimis.”

Global investors are facing up to the realities of investing in China’s $870 billion offshore debt market where creditors are often subordinated to domestic peers, leaving many with billions of dollars in potential losses. Sunac, which has $7.7 billion in offshore debt, made a payment on a domestic bond the day after announcing it defaulted on a dollar note and expected to miss payments on others.

Most of the $17.3 billion in payment failures across China’s credit market this year have been on offshore notes, a sharp reversal from previous years in part because of the massive amount of dollar debt sold by the property developers. 

Evergrande Default

China Evergrande Group, saddled with more than $19 billion in dollar debt, has been the biggest defaulter amid China’s property crisis after it missed payments in December. Like Sunac, Evergrande avoided a default in the domestic market by winning extensions from investors.

The moves underscore the diverging treatment of creditors where dollar bondholders often have little recourse even when they hold the bulk of the company’s debt. Sunac, for instance, has more than twice as much dollar bonds as domestic notes, according to Bloomberg-compiled data.

Prioritizing onshore payments means cash-strapped developers can maintain operations, while providing further security to negotiate payment extensions, according to Wei Liang Chang, a strategist at DBS Bank Ltd. 

What’s more, domestic bonds in China tend to have more collateral backing the notes and sit higher up in the capital structure than dollar debt. 

“Onshore creditors typically have asset collateral on their debts,” which creates a strong incentive to avoid default, according to Dan Wang, a Bloomberg Intelligence analyst.


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