Chinese property firms suffer fresh downgrades amid Evergrande crisis

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SHANGHAI/LONDON (Businesshala) – The woes of China Evergrande Group and other major homebuilders pushed debt market risk premiums on vulnerable Chinese firms to record highs on Wednesday and triggered a fresh round of credit rating downgrades.

FILE PHOTO: The China Evergrande Center building sign is seen in Hong Kong, China September 23, 2021. Businesshala / Tyrone Siu

Evergrande, which has more than $300 billion in liabilities and 1,300 real estate projects in more than 280 cities, missed its third round of interest payments on its international bonds this week, and other firms have also warned they could default. Huh.

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Rating agency S&P Global downgraded two of the sector’s biggest firms, Greenland Holdings – which has built some of the world’s tallest residential towers – and E-House, and warned it could further cut their ratings. could.

The $5 trillion asset sector accounts for almost a quarter of the Chinese economy by some metrics. In a clear sign yet that global investors’ concerns are rising, the spread – or risk premium, on investment-grade Chinese firms that have the most solid finances yet reached their biggest level in more than two months.

The spread on an equivalent high-yield or ‘junk’-rated index like Evergrande has hit a new all-time high of 2,337 basis points. This raised the yield – which shows how much firms would have to pay to borrow – to a staggering 24%.

Kim Ing Tan, a credit analyst at S&P Ratings, said in a report, “We see a risk that a disorganized correction in the property market could lead to a sharp drop in prices, impacting the personal wealth of homeowners. “

“Such an event could contribute to the massive loss suffered by contractors and service firms supporting investors and developers in wealth management products.”

Evergrande did not pay nearly $150 million worth of coupons on three bonds due on Monday after two other missed payments in September.

While the 30-day grace period means the company hasn’t technically defaulted, investors say they are expecting a lengthy and drawn-out debt restructuring process.

According to exchange data, bonds issued by developers including Shanghai Shimao Co., Ltd. China Aoyuan Group and Country Garden Properties Group fell between 1.6% and 7.4%, while Kaisa Group – the first Chinese real estate company to go back into default in 2015 Firm – saw something. Dollar denominated bonds drop to 35 cents on the dollar, reducing their yields to about 60%.

Cassa has $3.2 billion in international bonds to pay off next year, second only to Evergrande, which has $3.5 billion

An equity sub-index tracking A-shares of property firms fell 0.7%, compared to a 1.2% rise in China’s blue-chip CSI300 index.

“We continue to maintain an underweight position in the real estate sector for our China equity portfolio,” said Virginie Maisonneuve, Global CIO Equity at Allianz Global Investors. “We have no plans to add in the near term,” although he said Beijing should be able to address the problems.

debt wall

Evergrande’s main unit, Hengda Real Estate Group Co., faced a 121.8 million yuan onshore bond coupon payment on October 19, and Evergrande has another $14.25 million in bond coupons on October 30.

Debt pressure extends far beyond Evergrande. Chinese property developers have high-yield dollar bond coupons worth $555.88 million this month, and nearly $1.6 billion before year-end, and Refinitiv data at least $92.3 billion next year. shows such maturity of

Evergrande’s mid-sized rival Fantasia has already missed payments and Modern Land and Cynic Holdings are trying to delay the payment deadline, which is still likely to be classified as a default by the main rating agencies. .

“These stories challenge the notion that Evergrande is one-of-a-kind,” analysts at Capital Economics wrote in a note.

He added that although China’s policymakers would be able to avoid a “doomsday scenario”, the excessive asset sector would continue to weigh on the world’s second-largest economy, he said.

“Even after systematic restructuring of the worst-affected developers with minimal transition to the financial system, construction activity will still almost inevitably slow down greatly.”

Editing by Muralikumar Anantharaman, Kim Coghill, Kirsten Donovan

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