The Chinese property crisis has finally arrived after Fitch Ratings declared the giant Evergrande and smaller rival Kaisa Group in default on US dollar bond interest payments.
Thursday saw Fitch become the first rating agency to declare that China Evergrande’s overseas bonds to be in default after the world’s most indebted developer failed to make a crucial interest payment this week.
Evergrande missed meeting the 30-day grace period to pay $US82.50 in interest. The company has been silent on that deadline.
Fitch also confirmed Kaisa, a smaller property company but one of China’s most indebted, had also defaulted on $US400 million of bonds.
Trading in Kaisa shares on the Hong Kong Stock Exchange was suspended on Wednesday on doubts about its solvency.
Evergrande shares fell to a new record low of $HK1.73 on Thursday before the default statement from Fitch and finished the day at a record closing low of $HK1.80.
Evergrande shares have lost 87% of their value since the start of the year.
Kaisa Group Holdings Ltd has $US571 million bond due next week and has already indicated that it may not be able to repay them – collapse awaits.
And now, it seems yet another property giant is in crisis, with developer Sunshine 100 China Holdings Ltd missing payment on $US179 million of debt and interest payments.
The long forecast crisis has come to a head and will dominate well into 2022 as the central government and Communist Party seek to avoid the blame for a situation of their making years ago as they allowed massive debt and a building boom to run unchecked for too long.
But these pressures have been slowly surfacing for a while and especially for a week but apart from the lurch down to a 14-month low in the Hang Seng Index on Monday when Evergrande revealed it was effectively in a government overseen debt workout, the Hong Kong and Chinese share markets have been surprisingly calm
Indeed after the shares of property company Kaisa were halted for the second time in two months on Wednesday, the Chinese and Hong Kong markets rose.
Mainland investors are undoubtedly more confident – the key CSI 300 index (covers the top stocks on the Shanghai and Shenzhen markets) is up more than 5% in the past month which has cut the fall for the year to just on 3.6%.
The confidence among mainland investors is not shared in Hong Kong where the Hang Seng Index is down 3% in the past month and more than 11% year to date.
The government is responsible for the crisis when it started tightening controls in mid 2020 on lending and property developer activity and insisted state regulators take a tougher approach to deals, non-property transactions and insider activity.
Being the biggest and most indebted (over $US300 billion) Evergrande was the most watched developer slowly brought to heel by the tougher controls and government oversight (especially in Guangdong where the company is based).
Evergrande failing to meet the 30-day grace payment timetable this week for that $US82.5 million interest payment saw little market slippage or rancour, unlike in September and October when it first started missing deadlines.
Ten weeks or so later, a sense of calm this week (at least up till Thursday’s Fitch statements) because the markets now believe that Chinese authorities are seeking to gradually regain control over the property sector (with “punishments” to come).
Investors believe the attacks on Chinese businesses and their leaders, regardless of their wealth and reputation offshore, have humbled them into submission and property is no exception. Stricken developers will be restructured and those responsible will be mopped up.
It will be brutal, but investors take the attitude someone’s gotta do it.
The key moves started last Friday when Chinese authorities said they would step in and oversee risk management at the company.
In coordinated statements on Friday, the People’s Bank of China (PBOC) said short-term risk caused by a single real estate firm would not undermine market fundraising in the medium or long term, and that housing sales, land purchases and financing “have already returned to normal in China”.
Evergrande said on Monday it had established a risk-management committee including officials from state companies to assist in “mitigating and eliminating the future risks”.
That came after the provincial government of Guangdong said it would send a team to Evergrande at the developer’s request, which is one way of saying that the Chinese State has taken control of Evergrande which will now start managed debt-asset restructuring.
Then Monday night China revealed a cut in the reserve ratios for big urban banks (the type that have financed much of the lending to Evergrande and other property companies, or to so-called ’shadow banks’ and local and provincial governments to finance property deals.
That will see $US188 billion available from December 15 (the PBOC made it clear the money would not be wasted and would be used to help repay medium term loans, as much of the July release.
Like Evergrande, Kaisa has been overwhelmed by debt costs, falling cash flows and missed interest payments. In fact it was suspended in early November for three weeks after it missed a payment on a wealth management product, according to Reuters.
There is no immediate reason for the latest trading halt. Kaisa had said in late November that it would restructure offshore debt payments due in December by offering investors new bonds worth $US380 million that are now due in 2023. The original US dollar-denominated bonds were worth $US400 million.
But last week, the developer failed to close an exchange offer with bondholders, a move that Reuters says has raised the chances of the company defaulting.
Kaisa is the second-largest issuer of US dollar-denominated offshore high-yield bonds, according to French investment bank Natixis. Evergrande, ranks first.
In its statement cited uncertainty about Monday’s statement, pointing out that the Risk Management Committee comprisef the company’s senior management, representatives from Guangzhou state-owned enterprises, such as Guangdong Holdings Limited and Guangzhou Yuexiu Holdings Limited, as well as representatives from financial institutions such as China Cinda Asset Management Co., Ltd, “to mitigate and eliminate the group’s future risks.”
“There is limited information available on the company’s restructuring plan at this stage,” Fitch pointed out
Another credit ratings agency, S&P, said earlier this week that “default looks inevitable for Evergrande” with repayments of $3.5 billion on US-dollar denominated bonds due in the coming months.
“The issuer [Evergrande] does not seem to be making much progress in resuming construction, given its difficulties in raising new financing,” S&P Global analysts wrote in a note published Monday.