China's debt-crippled Evergrande has defaulted: Fitch

HONG KONG (BLOOMBERG, AFP, REUTERS) – China Evergrande Group has officially been labelled a defaulter for the first time, the latest milestone in months-long financial drama that is likely to culminate in a massive restructuring of the world’s most indebted developer.

Fitch Ratings cut Evergrande to “restricted default” over its failure to make two coupon payments by the end of a grace period on Monday (Dec 6), a move that may trigger cross defaults on the developer’s US$19.2 billion (S$26.2 billion) of dollar debt.

The downgrade came just minutes after Fitch applied the same default label to Kaisa Group Holdings, which failed to repay a US$400 million dollar bond that matured Tuesday. Together, the two companies account for about 15 per cent of outstanding dollar bonds sold by Chinese developers.

However, both companies have not officially announced defaults that could result in drawn-out debt restructuring processes.

More than 10 Chinese real estate firms have now defaulted in the second half of this year.

Long considered by many investors as too big to fail, Evergrande has now become the largest casualty of Chinese President Xi Jinping’s campaign to tame the country’s over-indebted conglomerates and overheated property market. Before this week, Chinese borrowers had defaulted on US$10.2 billion of offshore bonds in 2021, with real estate firms making up 36 per cent of the total, according to data compiled by Bloomberg.

While Evergrande bond holders face deep haircuts in a restructuring that could take months or even years to resolve, there were few signs of financial contagion on Thursday (Dec 9). That is partly because investors had been anticipating a default for months, but also thanks to a flurry of activity by China’s government to cushion the blow. Policymakers have in recent weeks cut lenders’ reserve requirements, signalled an easing of real estate curbs and rolled out measures to ensure higher-rated developers retain access to funding.

They have also taken a leading role in Evergrande’s restructuring, appointing officials from the developer’s home province to help oversee the process. While that is likely to help prevent nightmare scenarios of an uncontrolled Evergrande collapse, authorities have made it clear they have no intention of bailing out the property empire started by billionaire Hui Ka Yan 25 years ago.

In a pre-recorded video message at a seminar in Hong Kong on Thursday, People’s Bank of China governor Yi Gang described Evergrande’s situation as a market event that should be dealt with in a market-oriented way.

The Shenzhen-based developer, which disclosed more than US$300 billion of total liabilities as of June, said in a brief exchange filing on Dec 3 that it will “actively engage” with offshore creditors on a restructuring plan.

But with Chinese authorities now calling the shots, the developer has stayed largely silent on details of what its restructuring might look like. Even Fitch has struggled to get information from Evergrande, noting on Thursday that the developer did not respond to its request for confirmation on this week’s coupon payments.

“We are therefore assuming they were not paid,” Fitch analysts wrote in a statement.

Bloomberg reported earlier this week that bond holders had not received the money.

“The downgrade may not have an overt or immediate impact on the Chinese process, but may subtly increase pressure on the company (and regulators) to quickly reveal initial restructuring proposals,” said Mr Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong.

Evergrande bond holders including Marathon Asset Management have said they expect offshore creditors to be near the bottom of the queue for repayment.

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The Chinese government’s prime motivation is often maintaining social stability, which in this case means giving priority to home owners, employees and individual investors in wealth management products.

PBOC governor Yi said on Thursday that the “rights and interests of creditors and shareholders will be fully respected in accordance to their legal seniority”.

Neither Evergrande, nor Kaisa, have yet to make any comments on the default reports and what they plan to do next.

“In the next step, I think all the creditors will sue Evergrande,”  partner at research firm Plenum Chen Long told AFP, adding Fitch’s announcement formalised what investors already knew about the defaults.

Evergrande will have “to enter a period of restructuring”, he said, adding that while creditors will hope to secure assets on the mainland, “I don’t think it will be very successful”.

Some offshore bond holders see little use in pressing their case in Chinese courts, given the government’s heavy involvement in the overhaul. The fact that this is a cross-border restructuring with debt-issuing units listed in multiple jurisdictions creates another challenge for bond holders trying to get organised and show a united front.

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Still, some offshore creditors are already consulting with financial and legal advisers. It may help that bond holders have included some of the world’s biggest investment firms, which China is unlikely to want to alienate.

Ashmore Group, BlackRock, FIL, UBS Group and Allianz have all reported holding Evergrande debt in recent months, Bloomberg-compiled data show.

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