Fitch has become the first rating agency to declare that China Evergrande's overseas bonds are in default after the world's most indebted developer failed to make a crucial interest payment this week.
The announcement marked the most significant moment yet in the developer’s marathon liquidity crisis that has spread to other businesses across the country’s vast real estate sector and fuelled global concerns about the potential impact on China’s economy.
Evergrande, which has liabilities exceeding $300 billion, missed a Monday deadline to repay bond coupons totalling $82.5 million. The group had still not transferred the funds as of Wednesday in New York, according to people familiar with the matter.
Fitch stated that the company did not respond to a request for confirmation on the coupon payments, and it was therefore assuming they had not been made.
Neither the company nor the Chinese government has confirmed that Evergrande has defaulted on its debts, though the company said on Friday there was “no guarantee” it could meet its debt repayments as it entered a restructuring process with assistance from local government officials.
Fitch also stated on Thursday that Kaisa, another heavily indebted developer that failed to repay a $400 million bond that matured on Tuesday, was in restricted default. A person familiar with the situation said that Kaisa was close to signing non-disclosure agreements with advisers to investors.
Evergrande’s debt crisis has for months transfixed international bond markets, where it has borrowed heavily and has about $19 billion outstanding, compared with $12 billion for Kaisa. Evergrande has missed a series of interest payments since late September, but until this week had avoided default by transferring the funds before the end of 30-day grace periods.
Separately on Thursday afternoon, Yi Gang, governor of the People's Bank of China, told a seminar in Hong Kong that Evergrande's failure to meet its obligations was a market event and that the rights of investors would be respected.
Central bank
The central bank on Monday unleashed $188 billion of liquidity into the financial system in a bid to offset anxiety stemming from Evergrande’s debt crisis.
The group's chair Hui Ka Yan has resisted pressure to raise cash through rapid sales of the heavily indebted developer's best assets, including land, urban redevelopment projects in the Pearl River Delta – the prosperous southern Chinese region around Hong Kong – and the company's property management unit, according to people familiar with the matter.
“Hui wants to keep Evergrande’s most valuable assets unless he can sell them for a good price, which is not going to happen as everyone knows he is under stress,” said one person close to Chinese financial regulators.
Evergrande has also accelerated a lobbying campaign for more state bank support in recent weeks to help it avoid operational collapse.
The developer has told homebuyers and government officials in Wuhan and Nanning, two provincial capitals where it has stalled projects, that it was in talks with state governments for credit, according to two people close to the company's negotiations with local government officials.
Evergrande did not respond to a request for comment.
On November 22nd, an Evergrande representative in Wuhan said the company had applied for business loans from state lenders to support its operations there, according to meeting minutes seen by the Financial Times.
“If our loan application gets approved, we will consider paying off suppliers provided we complete the ongoing projects,” the executive said.
On Monday, Hui said that the group was forming a new risk management committee, with state representatives holding four of seven seats.
Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers.
Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time.
The group’s central role in China’s property market poses acute political risks for officials tasked with managing its restructuring, underscoring the urgent need for new financing.
In September, the group's failure to make payments on wealth management products bought by retail investors sparked protests outside its Shenzhen headquarters.
– The Financial Times Limited
