Four More Chinese Property Developers Are in Turmoil As Evergrande’s Bankruptcy Seems Inevitable
No company is now "too big to fail" in the eyes of Beijing.
Expected for several weeks, the bankruptcy of the Chinese real estate developer Evergrande now seems inevitable. Yesterday, it was S&P that deemed this bankruptcy “inevitable”. Today, Fitch has downgraded Evergrande to “restricted default” due to non-payment of offshore bond dues.
In its note on Evergrande, Fitch said the developer did not respond to its request for confirmation on the coupon payments worth $82.5 million that were due last month with the 30-day grace period ending this week.
“We are therefore assuming they were not paid,” Fitch said.
Fitch defines a restricted default as indicating an issuer has experienced a default or a distressed debt exchange but has not begun winding-up processes such as bankruptcy filings and remains in operation.
The fear of investors around the world goes far beyond the bankruptcy of Evergrande now
The fear of investors around the world, but also in Beijing, seems to be about to be confirmed: the financial crisis that Evergrande is going through could give rise to a domino effect that would affect the entire sector. So much so that the Chinese government has just put an additional foot in the group via the creation of a risk management committee open to representatives of semi-public groups.
The Evergrande group alone, with a debt of 300 billion dollars, would thus weigh for almost 10% of the total debt of the sector, estimated by Morgan Stanley at 2,800 billion dollars, or 18% of Chinese GDP. But the real estate giant is not the only one to be in trouble, many Chinese developers are in a delicate debt situation.
On the same note concerning Evergrande, Fitch has just announced that Kaisa Group, a much smaller Chinese developer, has started to work on restructuring its $12B offshore debt. The Chinese real estate market is on the verge of exploding, and behind Evergrande, here are 4 Chinese developers who are already having difficulties meeting their commitments.
A luxury apartment developer, Fantasia Holdings began operations in Shenzen in 1996. It was founded by Zeng Jie, the niece of Zeng Qinghong, who served as Chinese vice president from 2003 to 2008. Since 2009, the group has been listed on the Hong Kong Stock Exchange and ranks 73rd among Chinese property developers in terms of sales. Its financial difficulties are significant.
In October 2021, the group was unable to pay the equivalent of $315 million to its creditors. And admitted that it would probably “default on its external debts”. Its stock market listing was then suspended and when it resumed trading on November 10, the share price lost up to 50% of its value.
Founded in 1999 in Shenzen by Kwok Ying Shing, the Kaisa Group that Fitch just mentioned in its rating is only the 27th Chinese real estate developer but has the sad privilege of having been the first to default on a foreign bond (in 2015) and of being the second most indebted internationally after Evergrande.
Its offshore bond portfolio is close to $12 billion. Since early December, the group is on the verge of default. Its creditors have rejected its request to reschedule its debt of 400 million dollars.
Founded in 2000 in Beijing, Modern Land became, in October 2021, the fourth Chinese real estate developer to admit to being unable to repay part of its debts. It defaulted on a repayment of “only” $250 million.
While not a major player in the market, the developer has been noted for being one of the first to propose sustainable real estate projects and to issue green bonds. The latter would represent a portfolio of 1.3 billion dollars.
This real estate developer created in 2001 in Beijing is one of the latest victims of the crisis. On December 6, 2021, he indeed warned that he was "unable" to repay a loan of 170 million dollars, as well as interest. Discussions are underway with creditors to find a solution, the developer further explained. Among them is a rescheduling of the debt, but Sunshine 100 management did not give further details.
Beijing wants to send a message with Evergrande while making sure to avoid a real estate crisis with heavy consequences for its economy
As you can see, the situation goes far beyond Evergrande and its $300 billion in debt. One can imagine that these 5 real estate developers are just the tree that hides the forest and that the situation is even worse. If Beijing would let Evergrande go bankrupt, the signal sent would be incredibly powerful, as it would confirm that no company is now “too big to fail” in the eyes of Xi Jinping and the central power in Beijing.
Beijing has already taken control of other heavily indebted companies in the past through mechanisms similar to the risk management committee it has just set up for Evergrande. This was the case with the HNA conglomerate, which was taken over by the local authorities early last year and sold off in a piecemeal fashion. But never before has Beijing had to manage such a major restructuring, in a sector that is, moreover, extremely strategic for the Chinese economy.
Morgan Stanley believes that this process should include negotiations with Chinese creditors to secure financing for ongoing construction projects. At the same time, Evergrande has been trying to sell assets to raise fresh capital for several months. Beijing is trying to avoid contagion to the entire real estate sector and to promote bank lending, as evidenced by the announcement on December 6, 2021, by the People's Bank of China (PBOC) of a further reduction in the reserve requirement ratio for banks.
Beijing's reluctance to bail out Evergrande sends a clear signal that the Communist Party will no longer systematically bail out companies in difficulty, a practice that had resulted in swelling the debt of companies, especially state-owned ones, that felt safe from bankruptcy. But the Chinese government will have to untangle the debts of the promoter while minimizing the collateral damage.
A huge challenge for Beijing that could have repercussions on all the world's markets.
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