Source:
https://scmp.com/business/china-business/article/3159082/china-evergrande-kaisa-group-restricted-default-after
Business/ China Business

Evergrande joins Kaisa in ‘restricted default’ after missing bond payments, Fitch says

  • Fitch says Kaisa had reportedly failed to make payments on its US dollar bonds due on December 7 and had not responded to requests for comment
  • A restricted default means that a company is in payment default but has not entered into formal winding-up procedures
The ratings agency said Evergrande had missed bond repayments after the grace period lapsed on December 6. Photo: AFP

Embattled Chinese property developer China Evergrande Group and Kaisa Group Holdings have been downgraded to “restricted default” by international rating agency Fitch Ratings.

The downgrade on Thursday comes after several attempts by China Evergrande, the world’s most indebted developer, to stave off such an event through last-minute bond payments a couple of times over the past two months.

Fitch said that Kaisa had reportedly failed to make payments on its US dollar bonds due on December 7 and had not responded to requests for comment.

A restricted default is a grade higher than a default in Fitch’s definition, and means that a company has an uncured payment default but has not entered into bankruptcy filings, liquidation, or other formal winding-up procedures.

Fitch placed downgraded Modern Land to restricted default after it missed the payment on the US dollar bonds in October, and Fantasia Group Holdings after the developer failed to repay its US$206 million senior notes the same month.

The ratings agency said Evergrande had not made the payment of interest due on November 6 for its US$645 million 13 per cent bonds and US$590 million 13.75 per cent bonds, after the grace period lapsed on December 6.

Shenzhen-based Evergrande, teetering under 1.97 trillion yuan (US$308 billion) in total liabilities, has been under fire after it first defaulted on its financial wealth management product in September and missed a coupon payment on its offshore bond on September 23.

The developer then managed to meet 30-day grace periods in October and November on four occasions by offloading assets including founder Hui Ka-yan’s personal assets, such as a private jet and some houses in Hong Kong’s most expensive address, The Peak.

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Late on Friday last week, however, it said it had entered debt restructuring under the watch of the Guangdong provincial government, as it would not be able to fulfil an obligation to guarantee payments on a US$260 million bond.

Meanwhile, Kaisa, which is also based in Shenzhen, had about US$11.6 billion in outstanding notes. It has defaulted on dollar debt before, becoming the first Chinese developer to do so in 2015.

On Monday, a group of Kaisa noteholders sent the company a forbearance proposal with more detailed terms for negotiations, people familiar with the matter said, but the outcome of the talks was not known.

New Money Consortium, a group of bondholders which says it owns more than 50 per cent of the US$400 million bond, had earlier offered about US$2 billion in new funds to finance Kaisa through seven options, according to a presentation seen by the Post.

Chinese home builders have been in trouble after Beijing last August rolled out its so-called three red lines, or three leverage-ratios for developers to meet and which bar those having crossed all three from borrowing more money.

At the same time, Chinese financial regulators asked local banks to prolong the procedure of personal home mortgages to make it more difficult for individual homebuyers to borrow money for homes. As a result, another major funding avenue has been blocked for developers.

And these moves have pushed many highly-leveraged developers towards defaults. These include Sichuan Languang Development, Fantasia Holdings, Modern Land (China) and Sunshine 100.

A pall of gloom continues to hang over China’s once read-hot property sector. Yi Gang, the governor of the country’s central bank, said during a seminar in Hong Kong on Thursday that Evergrande’s default was a market event, and that it would be dealt with in a market-oriented way. The rights and interests of creditors and shareholders will be fully respected in accordance with their legal seniority, he added.

“It will not affect the normal financing of the market,” Yi said in a video message.