On Thursday, Fitch downgraded China Evergrande Group and Kaisa Group to “restricted default”. When the grace period for repaying debts for $645 million and $590 million expired on Dec. 6, the struggling Chinese property developer or its subsidiaries Tianji and Hengda failed.
Evergrande and Kaisa had combined to default on $1.6 billion in debt. The former owes $1.2 billion, while the latter owes $400 million to a smaller Chinese property firm.
The downgrading came roughly a week after Evergrande (HK: 3333) announced in a filing that it was reorganizing its offshore debt.
The fate of 25-year-old real estate company Evergrande, which has more than $300 billion in liabilities, and other indebted Chinese property businesses, has gripped financial markets in recent months.
The Chinese government’s next task is to avoid a bigger contagion from spreading from the debt issue in the property industry. On November, 10 the government summoned Evergrande after the company said that it did not have any more funds to clear off its debts.
“The defaults of Evergrande and Kaisa move us to the second step of this China Property downturn, with systemic risk being gradually replaced by idiosyncratic risk,” said Robin Usson, credit analyst at Federated Hermes.
“It will be interesting to see the role played by SOEs (state-owned enterprises) in the restructuring process, the level of ‘control’ exerted by the government over this ‘marketed-oriented approach’,” Usson added.
A restricted default, according to Fitch, occurs when an issuer has undergone a default or a distressed debt exchange but has not started winding-up steps like bankruptcy filings and is still operating.
The failure to pay has caused an “event of default” on Evergrande’s bonds, which means its other U.S. dollar notes will become due and payable immediately if the bond trustee or holders of at least 25% of the total amount declare so, according to Fitch.
A similar “cross default” applies to Kaisa, which faces $2.8 billion in note maturities next year and $2.2-3.2 billion in maturities each year between 2023 and 2025, according to Refinitiv data.
Fitch said it has little information on Kaisa’s restructuring plan after missing a $400 million payment on its offshore bonds on Tuesday.
Evergrande announced last week that it would proceed with a debt restructuring.