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The
downgrades to so-called "restricted default" status come even
though Evergrande and Kaisa have not officially announced
defaults that could result in drawn-out debt restructuring
processes.
The fate of Evergrande, which has more than $300 billion in
liabilities, and other indebted Chinese property companies has
gripped financial markets in recent months amid fears of
knock-on effects around the world, although Beijing has
repeatedly sought to reassure investors.
In its note on Evergrande, Fitch said the developer did not
respond to its request for confirmation on coupon payments worth
$82.5 million that were due last month, with the 30-day grace
period ending this week, and so assumed "they were not paid."
Evergrande and Kaisa did not immediately respond to Reuters'
requests for comment on Fitch's decision.
"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.
People's Bank of China (PBOC) Governor Yi Gang said on Thursday
rights of Evergrande shareholders and creditors would be "fully
respected" based on their legal seniorities, and the risk caused
by a few Chinese real estate companies in the short term would
not undermine Hong Kong's capital market.
Fitch defines a restricted default as indicating an issuer has
experienced a default or a distressed debt exchange, but has not
begun winding-up processes such as bankruptcy filings and
remains in operation.
The non-payment has triggered an "event of default" on
Evergrande's bonds and its other U.S. dollar notes will become
due immediately and payable if the bond trustee or holders of at
least 25% in aggregate amount declare so, Fitch said.
The same "cross default" is true for Kaisa, which, according to
Refinitiv data, has note maturities totalling $2.8 billion next
year, and $2.2-3.2 billion of maturities each year between 2023
and 2025.
Fitch said there was limited information available on Kaisa's
restructuring plan after it missed $400 million in offshore
bonds repayment on Tuesday.
Evergrande said last week it planned to forge ahead with a
restructuring of its debt.
KAISA TALKS
Kaisa is expected to soon sign a non-disclosure agreement (NDA)
with Lazard, the adviser of a group of bondholders, the source
and another person told Reuters. The bondholders hold over 25%
of Kaisa's $12 billion offshore bonds.
The NDA will lay the groundwork for further discussions on
forbearance and financing solutions, the people said, who
declined to be named as the talks are confidential.
But an agreement is unlikely in the next few weeks as the talks
are still at an early stage, the first source said.
Kaisa said it was open to talks on forbearance, but declined to
comment on details. Lazard declined to comment.
The group of Kaisa offshore bondholders, which says it owns 50%
of the notes that were due on Dec. 7, sent the company draft
terms of forbearance late on Monday.
The group previously offered $2 billion in fresh debt to help
Kaisa repay its onshore and offshore debts, sources have said.
Other financing ideas are also on the table.
Kaisa is also in talks with another bondholder group, the first
person said.
Kaisa's default came after it failed last week to secure the
minimum 95% approval needed from offshore bondholders to
exchange the bonds that were due Dec. 7 for new notes due June
6, 2023, at the same interest rate.
Trading in Kaisa's shares, which have lost 75% this year, was
suspended on Wednesday. Evergrande's stock has plunged 88% this
year.
(Reporting by Clare Jim in Hong Kong and Karin Strohecker in
London, additional reporting by Andrew Galbraith; Writing by
Sumeet Chatterjee Editing by Himani Sarkar and Mark Potter)
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