Debt-crippled Evergrande has defaulted, says Fitch

HONG KONG • China Evergrande Group has officially been labelled a defaulter for the first time, the latest milestone in a months-long financial drama that is likely to culminate in a massive restructuring of the world's most indebted developer.

Fitch Ratings cut Evergrande to "restricted default" over its failure to make two coupon payments by the end of a grace period on Monday, a move that may trigger cross-defaults on the developer's US$19.2 billion (S$26.2 billion) of dollar debt.

The downgrade came just minutes after Fitch applied the same default label to Kaisa Group Holdings, which failed to repay a US$400 million dollar bond that matured on Tuesday. Together, the two companies account for about 15 per cent of outstanding dollar bonds sold by Chinese developers.

However, both companies have not officially announced defaults that could result in drawn-out debt restructuring processes.

More than 10 Chinese real estate companies have defaulted in the second half of this year.

Long considered by many investors as too big to fail, Evergrande has now become the largest casualty of Chinese President Xi Jinping's campaign to tame the country's over-indebted conglomerates and overheated property market.

Before this week, Chinese borrowers had defaulted on US$10.2 billion of offshore bonds this year, with real estate companies making up 36 per cent of the total, according to data compiled by Bloomberg.

While Evergrande bond holders face deep haircuts in a restructuring that could take months or even years to resolve, there were few signs of financial contagion yesterday. That is partly because investors had been anticipating a default for months, but it is also thanks to a flurry of activity by China's government to cushion the blow.

Policymakers have in recent weeks cut lenders' reserve requirements, signalled an easing of real estate curbs and rolled out measures to ensure that higher-rated developers retain access to funding.

The policymakers have also taken a leading role in Evergrande's restructuring, appointing officials from the developer's home province to help oversee the process. While that is likely to help prevent nightmare scenarios of an uncontrolled Evergrande collapse, the authorities have made it clear that they have no intention of bailing out the property empire started by billionaire Hui Ka Yan 25 years ago.

In a pre-recorded video message at a seminar in Hong Kong yesterday, People's Bank of China governor Yi Gang described Evergrande's situation as a market event that should be dealt with in a market-oriented way.

The Shenzhen-based developer, which disclosed more than US$300 billion of total liabilities as at June, said in a brief exchange filing last Friday that it would "actively engage" with offshore creditors on a restructuring plan.

But with the Chinese authorities now calling the shots, the developer has stayed largely silent on details of what its restructuring might look like. Even Fitch has struggled to get information from Evergrande, noting yesterday that the developer did not respond to its request for confirmation on this week's coupon payments.

"We are therefore assuming they were not paid," Fitch analysts wrote in a statement.

Bloomberg reported earlier this week that bond holders had not received the money.

Evergrande bond holders, including Marathon Asset Management, have said they expect offshore creditors to be near the bottom of the queue for repayment.

BLOOMBERG, AGENCE FRANCE-PRESSE