Fears of property-linked debt defaults are on the rise again this week as major developers in China issued warnings about the poor outlook and reportedly missed coupon payments.
It’s crunch time again for Chinese developers which issued statements at the start of this week warning of difficulties to fulfill upcoming debt obligations.
The looming threat of China's real estate market imploding is not only worrying foreign investors who fear that they will not receive the money they are owed, but also the global financial community, who are concerned about the effects of the sector's downfall spreading.
Western market observers do not expect the Chinese leadership to bail out Evergrande, but some say that a partial bailout to limit the impact might be possible.
Year-to-date, Chinese firms have defaulted on a record-high of $10.2 billion in offshore bonds with real estate companies accounting for 36 percent, according to market data. Now, the following three major developers, are signaling weakness and the growing risk of even more souring debt.
China Evergrande
After months of teetering on the brink, China Evergrande is inching closer towards a formal default after offshore bondholders did not receive coupon payments at the end of a 30-day grace period on December 6 this week, according to a «Reuters» report citing multiple unnamed sources.
Authorities followed up with the setup of a risk management committee that includes officials from state entities who will focus on mitigating future risks at Evergrande which has over $300 billion of outstanding liabilities.
Immediately before the day the grace period ended, Evergrande issued a statement in an exchange filing that said there would be «no guarantee» that the group had sufficient funds to continue fulfilling its financial obligations.
Regulators were quick to jump in with the Guangdong government summoning founder Hui Ka Yan to express concerns about the announcement; the People’s Bank of China (PBoC) blaming the developer’s problems on mismanagement and excessive expansion; the China Banking and Insurance Regulatory Commission making assurances of increased support for guaranteed rental housing; and the China Securities Regulatory Commission claiming that any capital markets fallout was «controllable».
Kaisa
Despite being ranked just 27th in Chinese property sales, Shenzhen-headquartered Kaisa is the third largest issuer of dollar notes amongst the country’s developers with $11.6 billion of outstanding U.S. dollar debt offshore.
Kaisa is also on the brink of default after failing to win approval in late November from investors to swap a $400 million bond due on December 7 for new bonds maturing in 2023 at the same interest rate. Similar to Evergrande, it also issued a statement last Friday saying that there was «no guarantee» it could meet repayment obligations for maturing notes.
And yesterday evening on the day of the repayment deadline, holders of about $5 billion of Kaisa notes – under the advice of New York-based advisory firm Lazard – sent a proposal for a forbearance which could help avoid a formal default, according to a «Bloomberg» report citing unnamed sources.
Aoyuan
Guangzhou-headquartered Aoyuan has $4.3 billion of outstanding bonds with around 75 percent in U.S. dollar debt and two dollar notes with a combined principal of $688 million maturing in January.
After missing a 66 million yuan payment on a 78 million yuan trust note in early November which was followed by a series of rating agency downgrades, creditors demanded repayment of $651.2 million in debt.
In a December 2 exchange filing, Aoyuan noted that failure to meet the more than $650 million in repayment demands could trigger accelerated repayments on other offshore debt and cause «a material adverse effect on the group’s business, prospects, financial condition and operating results».
According to a Tuesday note from Fitch, «a default or default-like process has begun» at Aoyuan.
Other Developers
Other Chinese developers are also facing increasing pressure again including Shenzhen-based Fantasia which said on November 24 that creditors and filed a petition to wind up one of its entities with regards to a $149 million loan guaranteed by one of the property firm’s subsidiaries.
In addition to market guidance, regulators have also eased monetary conditions with the PBoC making the second cut this year to banks’ reserve requirement ratio (RRR), relaxing $188 billion of long-term liquidity to fuel growth in the midst of an economic slowdown.
