Beginning of the end for Evergrande as real estate giant declared in default

The development marks the beginning of the end for the sprawling real estate empire started 25 years ago by founder Hui Ka Yan, setting off a lengthy battle over who gets paid from what remains.

It also poses a challenge to the Chinese government’s efforts to prevent a debt crisis in the property sector from sparking broader contagion. Authorities have scored some successes, with markets taking the most recent developer debt stumbles in their stride after a reserve-ratio cut announced by the central bank on Monday.

Evergrande, which disclosed more than $US300 billion of total liabilities as of June, said in a brief exchange filing on December 3 that it plans to “actively engage” with offshore creditors on a restructuring plan. The company is planning to include all its offshore public bonds and private debt obligations in the restructuring, people familiar with the matter said separately.

Ships and boats are moored at the Ream Naval Base near Sihanoukville, Cambodia. China’s Belt and Road Initiative includes an influx of Chinese built infrastructure the country is hoping will bring jobs.

“The downgrade may not have an overt or immediate impact on the Chinese process, but may subtly increase pressure on the company (and regulators) to quickly reveal initial restructuring proposals,” said Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong.

Fitch also downgraded Kaisa to restricted default. The ratings cut may also trigger cross defaults on the developer’s $11.2 billion of outstanding dollar debt. The company had become a symbol of the boom years in Chinese credit markets after emerging from a high-profile default in 2015.

Chinese junk dollar bonds held earlier gains of as much as three cents on the dollar after the downgrades.

Beijing’s reluctance to bail out Evergrande sends a clear signal that the Communist Party won’t tolerate massive debt build-ups that threaten financial stability.

The People’s Bank of China reiterated on Friday that risks posed to the economy by Evergrande’s debt crisis can be contained, citing the developer’s “own poor management” and “reckless expansion” for the problems it faces. PBOC Governor Yi Gang said in remarks broadcast Thursday that Evergrande will be dealt with in a market-oriented way.

At the same time, the government is now deeply involved in management of the company. Guangdong said last week it would dispatch a team to Evergrande to ensure “normal” operations. The developer’s new seven-member risk committee includes senior managers from Guangdong state-owned enterprises and China Cinda Asset Management, the nation’s largest bad-debt manager. Another is from a law firm, while only two members are from Evergrande, including Hui.

Evergrande bondholders, including Marathon Asset Management, have said they expect offshore creditors to be near the bottom of the queue for repayment. The Chinese government’s prime motivation is often maintaining social stability, which in this case means giving priority to homeowners, employees and individual investors in wealth management products.

Evergrande’s overseas obligations also include bonds with keepwell provisions. These are essentially a gentleman’s agreement that often involves a pledge to keep an offshore issuer solvent, and may not be legally recognised in this restructuring.