Chinese Real Estate Giant Evergrande Declared In Default Of Its Huge Loans

China Evergrande has been labeled a defaulter for the first time, a milestone in months of financial drama that has paved the way for an unprecedented restructuring of the world’s most indebted developer.

After a grace period expired on Monday, Fitch Ratings reduced the developer’s credit rating to restricted default for failing to make two coupon payments. The credit assessor said the developer didn’t respond to requests for confirmation on the payment, and is assuming it wasn’t made. The downgrade may trigger cross defaults on Evergrande’s $US19.2 billion ($26.9 billion) of debt.

The development marks the beginning of the end for the sprawling real estate empire started 25 years ago by founder Hui Ka Yan, setting off a lengthy battle over who gets paid from what remains.

It also poses a challenge to the Chinese government’s efforts to prevent a debt crisis in the property sector from sparking broader contagion. Authorities have scored some successes, with markets taking the most recent developer debt stumbles in their stride after a reserve-ratio cut announced by the central bank on Monday.

In a brief exchange filing on December 3, Evergrande disclosed more than $US300 billion of total liabilities as of June, saying it intends to “actively engage” with offshore creditors to determine a restructuring plan. The company is planning to include all its offshore public bonds and private debt obligations in the restructuring, people familiar with the matter said separately.

Ships and boats are moored at the Ream Naval Base near Sihanoukville, Cambodia. China’s Belt and Road Initiative includes an influx of Chinese built infrastructure the country is hoping will bring jobs.

“The downgrade may not have an overt or immediate impact on the Chinese process, but may subtly increase pressure on the company (and regulators) to quickly reveal initial restructuring proposals,” said Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong.

Additionally, Fitch downgraded Kaisa to restricted default. Ratings cuts could also trigger cross-defaults on the developer’s $11.2 billion of outstanding dollar debt. After emerging from a high-profile default in 2015, the company became a symbol of the boom years in the Chinese credit market.

Chinese junk dollar bonds held earlier gains of as much as three cents on the dollar after the downgrades.

Beijing’s reluctance to bail out Evergrande sends a clear signal that the Communist Party won’t tolerate massive debt build-ups that threaten financial stability.

China’s People’s Bank reiterated on Friday that the risks posed by Evergrande’s debt crisis can be contained. The Bank cited Evergrande’s “poor management” and “reckless expansion” as reasons for the lender’s travails. PBOC Governor Yi Gang said in remarks broadcast Thursday that Evergrande will be dealt with in a market-oriented way.

At the same time, the government is now deeply involved in management of the company. Guangdong said last week it would dispatch a team to Evergrande to ensure “normal” operations. The developer’s new seven-member risk committee includes senior managers from Guangdong state-owned enterprises and China Cinda Asset Management, the nation’s largest bad-debt manager. Another is from a law firm, while only two members are from Evergrande, including Hui.

Bondholders of Evergrande, including Marathon Asset Management, expect offshore creditors to be near the bottom of the list when it comes to repayment. A primary motivation of the Chinese government is to maintain social stability, which in this case means giving priority to homeowners, employees, and individual investors.

Evergrande’s overseas obligations also include bonds with keepwell provisions. These are essentially a gentleman’s agreement that often involves a pledge to keep an offshore issuer solvent, and may not be legally recognised in this restructuring.

During a seminar in Hong Kong on Thursday, Central Bank Governor Yi said that creditors and shareholders’ rights and interests will be respected according to their legal seniority.

18520cookie-checkChinese Real Estate Giant Evergrande Declared In Default Of Its Huge Loans

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