Evergrande and Kaisa default: Two Chinese giants on the brink

Two massive Chinese companies — Evergrande and Kaisa — have been declared in default by American credit ratings agency Fitch Ratings.

A man walking past a housing complex built by Chinese property developer Evergrande, which defaulted on Thursday. Picture: Noel Celis / AFP

The debt-laden property developer Evergrande, which had racked up debts worth $A420 billion, failed to pay bond repayments and has been declared in default by Fitch Ratings.

A second property company also joined Evergrande in default overnight after days of speculation and a plummeting share price.

Fitch also confirmed Kaisa, a smaller property company but one of China’s most indebted, had also defaulted on $400 million of bonds.

Kaisa is China’s 27th-largest real estate firm, a minnow compared to Evergrande. But its default will do little to calm investor nerves.

According to Bloomberg News, before Thursday, at least 10 lower-rated real estate firms have now defaulted on onshore or offshore bonds since the summer.

Chinese borrowers had defaulted on a record $10.2 billion of offshore bonds, Bloomberg reported, with real estate firms accounting for 36 per cent of those non-repayments.

Evergrande had been given a month-long grace period to make the payments but on Friday revealed via a filing to the Hong Kong stock exchange that creditors had issued a demand for the payment of debts to the tune of $260 million.

Fitch Ratings agency, which downgraded the developer tonight, cited the failure to honour repayments.

“The non-payment is consistent with an ‘RD’ (restricted default) rating, signifying the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a material financial obligation,” Fitch said in a statement.

‘Missed Monday deadline’

The Financial Times reports that Evergrande “missed a Monday deadline to repay bond coupons totalling $82.5 million” and “did not respond to a request for confirmation on the coupon payments”.

On Wednesday, news.com.au reported Evergrande’s share price has plummeted to its lowest level since the property juggernaut’s debt crisis began in the wake of an alarming debt warning.

Evergrande shares fell to a new record low, closing down 20 per cent at 1.81 Hong Kong dollars.

That represented the stock’s lowest point since it was first listed in Hong Kong in 2009, with Evergrande losing a whopping 87 per cent of its value since the start of the year.

The company had been upfront in recent days about its financial position.

An aerial view of construction sites and residential developments in China where the Evergrande Group had been declared in default. Picture: Qilai Shen/Bloomberg

“In light of the current liquidity status … there is no guarantee that the group will have sufficient funds to continue to perform its financial obligations,” Evergrande said in the note.

The company’s billionaire boss, Hui Ka Yan, had previously been requested to dip into his vast personal wealth to keep the company afloat, with Evergrande also desperately trying to sell off assets in a bid to raise much-needed cash.

Bloomberg journalist Srinivasan Sivabalan wrote on Thursday that “China’s real estate debt crisis has breached a red line”.

“Evergrande has defaulted on its dollar-denominated debt,” he tweeted.

“About 95% of Evergrande’s >$300 billion debt is local. The default on $19.2 of dollar bonds sucks foreigners into China’s problems. Makes clear no bailout is coming.”

Chinese property developer Evergrande has defaulted for the first time. Picture: Noel Celis / AFP

Fears dreaded contagion already taking effect

There are growing signs a dreaded “contagion” is already in full swing, with the fiasco facing Evergrande already spreading within the property sector.

In October, fellow Chinese real estate developer Fantasia missed a payment on a $US206 million ($A282 million) bond that had matured the day before, triggering a default, while another firm, Sinic Holdings, also defaulted on a debt interest repayment that month.

On Friday, Kaisa Group Holdings Ltd warned it might not pay off its $571 million bond due next week.

And now, it seems yet another property giant is in crisis, with developer Sunshine 100 China Holdings Ltd missing payment on $179 million of debt and interest payments due Sunday.

Evergrande was once China’s largest property developer.

Hui Ka Yan, chairman of China Evergrande Group. Picture: Paul Yeung/Bloomberg

But the real estate project boom came at a cost and debts mounted to well over $US300 billion.

News.com.au reported in November that Beijing was about to send a clear message after years of bailing out property developers and poorly run state owned enterprises that the days of easy bailouts and freely flowing government cash injections are over.

The situation with Evergrande has ramifications for all of China.

A 2020 study authored by Harvard economist Kenneth Rogoff and Beijing Tsinghua University economist Yuanchen Yang found that real estate related activities accounted for 28.7 per cent of Chinese GDP in 2016.

— with Alexis Carey