Evergrande and Kaisa Defaults to Trigger Broader China Debt Crisis?
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Chinese real estate developers Evergrande and Kaisa have defaulted on their debts.
Fitch Ratings has become the first major agency to designate Evergrande, China’s largest developer, a defaulter. The developer has been downgraded to a rating of restricted defaulter.
Evergrande is assumed to have missed a Monday deadline for payment on coupons valued at $82 million. Fitch says it reached out to Evergrande regarding whether the payments had been made but received no reply.
The default opens the way for the restructuring of Evergrande’s $300 billion debt pile.
Although the exact extent of the debt burden being carried by the real estate sector is unknown, it is thought that at least of a third of real estate developers are struggling to keep up with payments on the debt they have issued.
In a sign of the deepening crisis in the real estate sector Chinese home prices have been falling.
Kaisa fails to repay $400 million bond
Just this week developer Kaisa saw trading in its shares suspended on the Hong Kong stock exchange yet again.
Fitch today reported that Kaisa has failed to repay a $400 million bond which matured on Tuesday, and as a result has also downgraded it to restricted default. The developer is sitting on $11.2 billion of dollar debt that it has to service.
Kaisa is not new to the world of debt repayment difficulties – it defaulted in 2015.
Evergrande and Kaisa: real estate debts a systemic risk?
There are also concerns that the trouble in the real estate sector could be a systemic risk that spills over into the rest of the economy.
As far as Evergrande is concerned, the latest news makes a cross default more likely, where creditors demand repayment on its other obligations, in particular its $19 billion in dollar-denominated debt.
The default by Evergrande has been expected by credit market participants for some months. Last Friday the company said there was “no guarantee” that it would meet all its debt repayment obligations.
Chinese government fails to confirm Evergrande default
Founded a quarter of a century ago by Hui Ka Yan, Evergrande investors and bondholders face testing times as the company faces bankruptcy.
As yet neither the Chinese government or the company itself have confirmed the default.
However, on Monday, as we reported on EconomyWatch, China reduced capital reserve ratios for banks in a move which at the time looked like it was part of preparations for the default, given the exposure of Chinese banks to the real estate sector.
China’s central bank, the People’s Bank of China (PBOC), said last week that Evergrande’s problems were containable, but derided the management for its “reckless expansion” in an indication that the government is reluctant to bailout the company.
Governor Yi Gang says Evergrande’s problem must be addressed by the market, but that entails the risk of triggering even greater problems in the debt market, threatening the wider economy.
Real estate expansion has been a key driver of the country’s economic expansion over the past decade and more.
In an exchange filing on 3 December Evergrande reported that it would “actively engage” with its offshore creditors regarding putting together a restructuring plan. According to a report by Bloomberg the company plans to include all its offshore public bonds and private debt in the restructuring.
