Evergrande, Kaisa cut by Fitch to default

Ratings agency Fitch downgraded property developers China Evergrande Group and Kaisa Group. They stated that they had defaulted on offshore bonds. Also, Kaisa had started work on restructuring its $12 billion offshore debt. The downgrades to the restricted default status come even though Evergrande. And Kaisa have not officially announced defaults that could result in drawn-out debt restructuring processes.

Evergrande, which is having more than $300 billion in liabilities. Also, other indebted Chinese property companies has gripped financial markets in recent months. And that is amid fears of knock-on effects around the world. This is although Beijing has repeatedly sought to reassure investors. In its note on Evergrande, Fitch said that the developer did not respond to its request for confirmation on coupon payments worth $82.5 million. There is a 30-day grace period, and so assumed that they were not paid.

Robin Usson, credit analyst at Federated Hermes said that the defaults of Evergrande and Kaisa move them to the second step of this China Property downturn. And that is with systemic risk being gradually replaced by idiosyncratic risk. Usson added that it will be interesting to see the role played by SOEs (state-owned enterprises) in the restructuring process, the level of ‘control’ exerted by the government over this ‘marketed-oriented approach’. People’s Bank of China (PBOC) Governor Yi Gang said that the rights of Evergrande shareholders and creditors would be fully respected. And that is based on their legal seniorities. The risk caused by a few Chinese real estate companies would not undermine Hong Kong’s capital market.

The non-payment has triggered an event of default on Evergrande’s bonds. The Cross default is true for Kaisa, has note maturities totalling $2.8 billion. Fitch said that there was limited information available on Kaisa’s restructuring plan. Evergrande said that it planned to forge ahead with a restructuring of its debt. Gustavo Medeiros at Ashmore Group wrote in a recent note to clients that the banks and bondholders (both local and foreign) will welcome debt re-profile exercises from companies with liquidity problems.

This is as long as they are conducted in a fair, transparent and candid manner. The UK-listed asset management firm had exposure to both Evergrande and Kaisa bonds. Kaisa is expected to soon sign a non-disclosure agreement (NDA) with Lazard. The bondholders hold over 25% of Kaisa’s $12 billion offshore bonds. The NDA will lay the groundwork for further discussions on forbearance and financing solutions. But an agreement is unlikely in the next few weeks. The group of Kaisa offshore bondholders had sent the company draft terms of forbearance.

The group previously offered $2 billion in fresh debt to help Kaisa for repaying its onshore and offshore debts. Kaisa is also in talks with another bondholder group. Kaisa’s default came after it failed to secure the minimum 95% approval, that is needed from offshore bondholders to exchange the bonds. Trading in Kaisa’s shares, which have lost 75% this year, was suspended. Evergrande’s stock has plunged 88% this year.