Fitch sees default: Evergrande is dangerously approaching the abyss

Fitch sees default
Evergrande is dangerously approaching the abyss

By Christiane Kreder

The US rating agency Fitch is the second of the major international agencies to give the heavily indebted Chinese real estate developer Evergrande little chance of survival. A total failure could have an impact on the entire industry.

One thing is certain right now: The heavily indebted real estate company Evergrande is fluctuating worryingly in the direction of insolvency. Most recently, the rating agency Fitch made official with its reassessment of the group what many market observers have feared for months: Fitch downgraded the group, which is sitting on a mountain of debt of 300 billion US dollars, to the level of “limited loan default”. With Standards & Poor’s, the second rating agency is already expecting payment default at Evergrande. Both relate to the missed coupon payment by the Evergrande subsidiary Scenerey Journey, whose extension period expired on December 6th.

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Evergrande had already warned last week that the group could not guarantee that it would continue to meet its financial obligations. On Tuesday, two dollar bond creditors finally reported to Bloomberg that they were still waiting for the $ 82.5 million interest payment from Evergrande subsidiary Scenerey Journey after the 30-day grace period had expired.

Evergrande also usually only met the previous interest payments as part of a deadline extension – and often only just before the deadline expired. A due payment of 83.5 million dollars was not made by the group until the end of October one day before the extension expires. He made another $ 47.5 million coupon payment shortly thereafter, just hours before the deadline.

According to the Chinese business magazine “Caixin”, the next coupon payments for dollar bonds amounting to 253 million dollars are waiting at the end of December, followed by a further payment of 415 million dollars in January.

Beijing is holding back

However, it does not look like the government in Beijing will rush to rescue the company with rescue measures. On Thursday, China’s central bank chief Yi Gang announced that Evergrande’s risks were a “market operation” that would be dealt with according to market principles. Companies and shareholders must adequately deal with “their own debts” and protect the interests of creditors in accordance with legal requirements and market regulations, Yi Gang said.

A few days earlier, the Chinese central bank had stated on its website that Evergrande had caused the existing problems mainly through “its own mismanagement” and its “breakneck expansion”. It is true that the real estate market in China has collapsed at times. But the sale of apartments, the purchase of land and financing have already returned to normal in China.

The central bank also announced that it would work with the Guangdong provincial government, relevant authorities and local governments in risk management “to promote stable and healthy development of the real estate sector and protect the legal rights and interests of homebuyers.”

The provincial government in Guangdong had already confirmed last Friday that it would send a team at Evergrande’s request to help improve risk management and maintain normal business operations.

Creditor wants to file for bankruptcy

Market observers see the reluctance of the authorities as an attempt to calm the market down and curb concerns about the effects on the entire real estate sector and the financial markets. The stock exchanges in Hong Kong and Shanghai did not react comprehensively to Fitch’s downgrade of Evergrande – Evergrande shares had already dropped to a record low of 1.72 Hong Kong dollars (around EUR 0.2), but the move is widely considered to be last sign of a possible bankruptcy.

While the Evergrande Group has been largely silent so far, the bond creditor Financial Market Partners Capital Consulting AG (FMPC), together with the previously largely unknown DMSA Deutsche MarktScreening Agentur, has been preparing an application for bankruptcy since November. It is now ready and should be submitted in the coming days to the competent court in George Town on the Cayman Islands, where the Evergrande Holding is registered, according to a press release. An insolvency administrator has already been found there, reports the “Manager Magazin”.

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“Evergrande is insolvent, but not yet officially insolvent,” explains Marco Metzler, Chairman of the Board of Directors of FMPC and Senior Analyst at DMSA. “Since this application has not yet been made, we – DMSA and FMPC Consulting – fear that assets could be removed from the bankruptcy estate.”

DMSA and FMPC only bought 200 Evergrande bonds for $ 50,000 in early November, Manager Magazine reported. According to Metzler, they are concerned with the principle and transparency. Such a step is not yet known from other creditors, for whom much higher sums are at stake in the event of bankruptcy.

More companies with payment difficulties

According to Chinese law, Evergrande is not obliged to file for bankruptcy itself. “However, creditors can file a so-called third-party application,” explained Elske Fehl-Weileder, specialist lawyer for bankruptcy law at Schultze & Braun, in an interview with Capital at the beginning of October. Once the insolvency proceedings have opened, there are three options for further development, from the sale of the group and individual parts to a settlement proceeding with unsecured creditors and restructuring proceedings. The latter is equivalent to a protective shield procedure with an insolvency plan, explained Fehl-Weileder. “That is what Evergrande should strive for too.” In this way, the company could “stay at the helm”.

In addition to Evergrande, other Chinese real estate groups recently reported payment difficulties. On Thursday, Fitch also downgraded competitor Kaisa to the level of “limited loan default”. The reason: The company did not repay a bond in the amount of 400 million US dollars by the due date last Tuesday. Because of concerns about Kaisa’s solvency, trading in the shares on the Hong Kong Stock Exchange was suspended on Wednesday.

At the beginning of the week, real estate developer Sunshine 100 China Holdings announced that they had to allow a repayment period of around $ 170 million plus interest to pass. Talks with creditors about debt rescheduling or other solutions were already underway, it said. It is true that Sunshine 100 China is not a major industry representative. For market observers, however, the latest developments represent the upheaval in which the Chinese real estate sector is currently experiencing.

Market observers fear that if the industry, which together with dependent service providers and suppliers accounts for almost 30 percent of Chinese GDP, gets into trouble, the economic consequences could be felt throughout China and beyond.

The article first appeared at Capital.de.

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