Two Chinese real estate developers, including sector giant Evergrande, have stopped paying interest, according to ratings agency Fitch on Thursday (9), amid market concerns about their financial health.
The real estate market and construction sector account for over 25% of China’s GDP and act as a driving force for many other sectors such as steel and furniture.
But to reduce the sector’s indebtedness, last year Beijing tightened conditions for accessing credit for real estate developers.
Evergrande, number one in the industry, has since found itself without cash and its financial situation has deteriorated considerably in recent months.
Huge and sometimes risky investments — tourism, leisure, digital and electric cars — also explain its precarious situation.
The group’s setbacks, in turn, generated a crisis of confidence among potential buyers. The result: Home sales and prices are falling in many Chinese cities.
Evergrande has a debt of more than US$300 billion (R$1.6 tri). And he has been fighting for several months to honor interest payments and apartment deliveries.
On November 6th, the group was supposed to have made a payment of US$82.5 million (BRL 460.1m), for which it had a one-month grace period, which ended on Tuesday (7).
“Neither Evergrande nor its creditors have made any announcements about a refund,” said credit-rating agency Fitch, which has come to believe the group “has not paid.”
As a result, the financial rating agency downgraded Evergrande’s strength rating one notch, to the penultimate tier on its list.
“It’s the formalization of default,” commented Chen Long, an expert at consultancy Plenum. “Evergrande was in default since Monday on two loans,” he said.
“I believe that all creditors will file suits and the group will have to enter a period of restructuring,” he said.
In this context, creditors will seek to obtain certain assets from the developer, predicts the expert. “But I don’t think they will succeed. They will have to deal with the company,” being in a weak position given that most of the assets are in mainland China.
This is the first ‘default’ (suspension of payment) of Evergrande, which had always managed to pay creditors at the last minute.
The tone changed last week, however, when Evergrande once again warned of the possibility of defaulting on his debts.
Its founder, billionaire Xu Jiayin, was summoned by the authorities of the province of Guangdong (south), where the group’s headquarters are located.
Although Beijing has yet to announce whether or not it intends to help Evergrande, Central Bank President Yi Gang hinted that the group’s fate will be left to the laws of the market.
Evergrande says it employs 200,000 people and indirectly influences 3.8 million jobs in China. Its bankruptcy, therefore, would have catastrophic consequences for the Chinese economy, but also on a social level, with the risk of unrest.
Most analysts, however, consider a “Lehman Brothers” scenario unlikely because markets anticipated the difficulties.
At the same time, the Kaisa real estate group, one of the most indebted in the country, also failed to make a payment, according to Fitch.
Kaisa was supposed to pay $400 million (BRL 2.2 billion) in interest on Tuesday (7).
The group had already warned last week that it ran the risk of default.
Kaisa, who has 17,000 employees, was the first Chinese real estate group to default on dollar-denominated bonds in 2015.
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