China Evergrande’s dollar bonds fell more than 10% after being hit by a double whammy. Investor concerns rose amid speculations of a creditor’s claims against the company in a Guangzhou court (which appeared on a now-deleted WeChat post) alongside a two notch downgrade by S&P late on Thursday. The rating agency downgraded Evergrande and its subsidiaries Hengda Real Estate and Tianji Holding by two notches to CCC from B- with a negative outlook indicating substantial credit risk and a real possibility of default. The ratings on offshore debt issued by Evergrande and guaranteed by Tianji have also been lowered to CCC- from CCC+. The action comes close on the heels of a two-notch downgrade to B- by S&P on July 26, 2021. According to the rating agency, the nonpayment risk on the world’s most indebted realtor is escalating due to asset freezes from various commercial properties. Contract disputes have been rising over the last couple of weeks as the company is delaying payment settlements. The ensuing strain on liquidity and negative media reports are resulting in lenders’ risk adjustment making access to funding more difficult for the property company. The company is expected to have payables of CNY 240bn ($37bn) over the next 12 months, of which ~CNY 100bn ($15.5bn) is due this year. The company is working to raise additional equity through the listing of Fangchebao Group Co. and disposal of some property assets.
Though the property developer has been making payments towards its offshore debt, the sheer size of debt remains a concern. The rating agency said, “We lowered the ratings because Evergrande’s liquidity position is eroding more quickly and by more than we previously expected. The company’s nonpayment risk is escalating, not only for the substantial public bond maturities in 2022 but also for its bank and trust loans and other debt liabilities over the next 12 months.”  Evergrande’s rating was also lowered by two notches to Caa1 by Moody’s earlier this week and to CCC+ by Fitch late last month..  8.25% 2022s7.5% 2023s and 12% 2024s were down 6.56, 4.95 and 5.19 to trade at 54.19, 44.5 and 43.57 respectively. Bonds have not seen much respite after reports that short seller bets have more than doubled on Evergrande’s bonds.
Concerns from the company have weighed on other Chinese developers as well. China-based integrated property developer Kaisa Group’s bonds are down up to 3.5 points this morning. Its 8.5% 2022s10.875% 2023s and 9.375% 2024s were down 1.63, 2.04 and 3.31 points to trade at 94.38, 91 and 85.06 respectively. The regulators now require these firms to meet the “three red lines” which is also limiting their capacity to expand through acquisitions.
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