Fitch Downgrades China Evergrande, Sees “Likely” Default

By Andrew Galbraith

(Reuters) -Fitch Ratings lowered the ratings of China Evergrande Group and two of its subsidiaries on Wednesday, the latest in a series of downgrades targeting the real estate company amid concerns over its ability to restructure its massive debts.

Regulators have warned that Evergrande’s liabilities of 1.97 trillion yuan ($ 304.79 billion) could trigger greater risks to the country’s financial system if it is not stabilized.

Fitch said in a statement that it downgraded the long-term default ratings of foreign currency issuers from Evergrande and its subsidiaries Hengda Real Estate Group Co and Tianji Holding Ltd to CC from CCC +. Fitch defines a CC rating as indicating “very high levels” of credit risk.

Fitch also downgraded the senior unsecured ratings of Evergrande and Tianji, as well as the rating of the senior unsecured bonds guaranteed by Tianji issued by Scenery Journey Limited to C by CCC.

“The downgrade reflects our view that some default seems likely. We believe the credit risk is high given tight liquidity, declining contract sales, pressure to address late payments to suppliers. and subcontractors and limited progress on asset disposals, ”Fitch said.

Fitch said he saw few signs of progress in the sale of the property management business of Evergrande, Evergrande Property Services Group and its new energy vehicle business China Evergrande New Energy Vehicle Group Ltd, and warned that there was a “significant performance risk” surrounding their assignment. He said this raised the possibility of default on interest payments on offshore bonds.

Although Evergrande has no bonds maturing in 2021, Fitch estimated that it would face bond interest payments of $ 129 million in September alone and $ 850 million before the end of the year. the year.

The company also struggled with payments to suppliers. On Tuesday, a stock market record showed that Evergrande had outstanding debts worth 562 million yuan to a supplier, Skshu Paint Co Ltd, at the end of August.

Evergrande’s failure to pay certain commercial papers on time in June triggered a massive sell-off of its stocks and bonds, and a growing number of vendors have taken legal action to collect overdue payments.

CHAIN ​​OF DECLASATIONS

The downgrade of Fitch follows the downgrades of Moody’s Investors Service and the national rating agency China Chengxin International (CCXI) in recent days.

Evergrande shares fell as low as 3.08% in early trading on Wednesday before rebounding more than 4%, although they remain down nearly 15% for the month. Evergrande Property Services rose 1.6% and Evergrande New Energy Vehicle fell more than 9% on Wednesday.

Its offshore bonds rose, with data provider Duration Finance showing the average price of its June 2025 bond up about one cent to 27.48.

“Investors are just impatient and sold,” said a Hong Kong-based portfolio manager, explaining past declines in bond prices. He said he considered 26 cents a “good entry point” for the 2025 bond.

The price of the Evergrande bond traded in Shenzhen in May 2023 fell 2.86% to 33.998 yuan.

The bond’s price has fallen nearly 50% since the downgrade of CCXI last week made the company’s onshore bonds ineligible to be used as collateral in repo finance transactions.

($ 1 = 6.4634 Chinese yuan)

(Reporting by Kanishka Singh in Bengaluru and Andrew Galbraith in Shanghai; Editing by Muralikumar Anantharaman, Ana Nicolaci da Costa and Kim Coghill)

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