Another day, another dismal development for "China's Lehman", with Bloomberg reporting that just hours after Fitch joined Moody's in a triple-notch downgrade of China's property development giant (from CCC+ to CC), coupled with a warning that "default appears probable", the dollar bonds of China Evergrande fell to fresh lows, after a report from financial intelligence firm REDD that the firm plans to suspend interest payments on loans from two banks due Sept. 21, and asked a lender to wait for instructions about an extension plan..
For those saying that there is a word for this, you are right: it's technical default, or "selective default" in the parlance of rating agencies; it occurs when a borrower fails to pay one or more of their obligations but continues to meet other payment obligations, and usually precedes a full-blown default and/or bankruptcy although in China the distinction tends to be a little blurry.
Following the news, Evergrande's dollar bond due 2025 fell 1.5 cents on the dollar to 24.2 cents with all other USD bonds sliding in sympathy...
... having already been hammered earlier after Fitch said that its 3-notch downgrade "reflects our view that a default of some kind appears probable."
Evergrande itself warned last week of default risks if its efforts to raise cash fall short. Last Friday, the company also said its contracted sales in August, including those to suppliers and contractors to offset payments, dropped 26% compared with a year ago.
The insolvent Evergrande has become one of the biggest financial worries in China, the epicenter of a potential default shockwave given its massive pile of $305 billion in liabilities to banks, shadow lenders, companies, investors, vendors and home buyers. Investor fears that a default is imminent have led to a crash in the firm’s bonds in recent weeks, which are now trading as if the company is already broke, and triggered fears about contagion risk in the broader credit market.
In the previous two days, several Evergrande bonds were suspended from trading following a liquidation scramble. The company's 6.98% bonds due July 2022 were suspended temporarily after falling more than 20% in Shenzhen, according to a statement from the city’s stock exchange that echoed a similar intervention on Friday. On Tuesday, Evergrande's 5.9% local bonds dude 2023 were also halted after a plunge.
Having been a largely isolated affair, fears about Evergrande's rapidly unfolding liquidity crisis finally spilled over and led to contagion at other Chinese property developers. As the FT reported, Fantasia Group, a third property company facing refinancing concerns, said in a statement to the Hong Kong stock exchange on Monday evening that it had made several purchases of its own bonds, one of which matures in December. Its bonds sank to 78 cents on the dollar. Fantasia said in the filing that the purchases of its own bonds would “reduce the company’s future financial expenses and lower its financial gearing level”.
In language reminiscent of Evergrande’s challenges, Moody’s late last week estimated that Guangzhou R&F did not have enough cash to cover its debt repayments in the next year and a half, meaning it would need to rely on “new financing or asset sales”.
In a separate filing late on Friday, it said the bonds had also been bought through companies wholly owned by Fantasia’s founder Zeng Jie, niece of Zeng Qinghong, a former vice-president of China.
Chinese property developers are also grappling with tighter credit conditions and weaker sales within China after Beijing introduced rules last year to constrain developers’ leverage, not to mention choppy trading on international markets, where they are some of Asia’s biggest high-yield borrowers.
“Overall, the funding conditions have tightened and the offshore bond market is also getting more volatile,” said Kaven Tsang, a senior vice-president at Moody’s. "That actually has some negative implications on the market as a whole,” he added. “The refinancing risk has increased."
One look at the yield on Chinese junk bonds - which has risen to levels not seen since the covid pandemic shut down the entire Chinese economy back in March 2020 ...
... shows just how serious China's property crunch has become, even as stocks in the US continue to flirt with all time highs without a care in the world.