Fitch downgraded the ratings of China Evergrande Group and its subsidiaries to ‘B’, from ‘B+’ citing pressure to downsize its business and reduce total debt. Subsidiaries include Hengda Real Estate and Tianji Holding. The senior unsecured ratings of Evergrande and Tianji have also been downgraded to ‘B-‘, from ‘B’. They also gave a Negative outlook reflecting Evergrande’s weakened access to debt capital markets and heavy reliance on trust loans.
Fitch notes that while Evergrande plans to reduce total debt by CNY 150bn ($23bn) in 2021, they are subject to execution risk. Leverage, measured by net debt/adjusted inventory has fallen to 35% in 2020 from 44% in 2019 they note. Evergrande is forecasted to shorten its land bank life to 2 years from the current 3 years which is a positive in controlling leverage but could weaken its business profile and sustainability.  Fitch noted that while Evergrande would receive CNY 2.5bn ($386mn) by selling a 29.99% stake in China Calxon, it would be immaterial compared to its total debt size of CNY 716bn ($110bn) in 2020. Fitch states that a significant portion of Evergrande’s balance sheet relies on trust financing with ~40% of total debt in trust loans, a less stable source of funding especially now due to poor debt-market sentiment. Fitch compares Evergrande to R&F Properties, which is rated one notch higher at B+. Despite Evergrande’s lower leverage (net debt/adjusted inventory), its high trade/bills payable, lower liquidity, weaker access to funding channels and shorter land bank life are reasons for the one notch lower rating assigned to Evergrande.

Separately, Evergrande sold shares in its internet unit HengTen Networks Group for $570mn to ease funding pressures as per Caixin citing a filing. The shares were bought by Ke Liming, owner of Pumpkin Films Ltd. Sources as per Bloomberg say that three banks with a combined CNY 46bn yuan ($7.1bn)
in exposure to Evergrande as of June 2020 have decided to renew loans to the company when they mature this year and that some trust firms are reassessing their lending exposure.. They add that three other banks are allowing Evergrande to roll over portions of credit lines it has already tapped but are limiting access to any untapped credit.

Evergrande’s dollar bonds were lower after the rating action – its 8.75% 2025s were down 1.3 points to 72.45 and its 8.5% 2022s were down 0.5 to 91.23
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