The debt problems afflicting China’s real estate market deepened on Tuesday after a developer
defaulted on its bonds while the world’s most heavily indebted property group Evergrande
extended a suspension of its shares into a second day without explanation.
Fantasia Holdings, a mid-sized developer that just weeks ago assured investors it
had “no liquidity issue”, said in a stock exchange filing that it “did not make the payment”
on Monday of a $206m bond maturing that day, triggering a formal default.
The default adds to fears that a crisis at Evergrande will spread to include more of China’s
property developers, which account for a large portion of the Asian high-yield bond market.
The real estate sector faces pressure from Beijing to reduce leverage after decades of debt-driven
expansion that helped fuel the country’s rapid economic growth.
Evergrande missed an interest payment on an offshore bond on September 23, triggering a 30-day
grace period before a formal default, and has yet to provide any announcement on the matter.
Fantasia also suspended trading in its shares before markets opened on Tuesday in Hong Kong,
joining Evergrande, which halted trading of its holding company and its property services unit on
Monday morning. Evergrande’s services
unit said in an exchange filing on Monday that it suspended trading in advance of a
“possible general offer” for its shares. Hopson Development, another Hong Kong-listed developer,
also froze its shares on Monday, prompting speculation from Chinese media that it could take
a majority stake in Evergrande’s property services business, which listed last year.
On Tuesday morning, Evergrande had yet to provide any further details on the potential deal,
raising the spectre of an indefinite trading halt
as the company rushed to meet obligations on total liabilities of more than $300bn.
“There’s nothing investors can do . . . the worst is yet to come,” said Dickie Wong,
head of research at Hong Kong-based Kingston Securities.
Wong said there was no rule preventing companies listed in the city from suspending
shares for months on end solely on the basis of a terse statement devoid of any real detail.
As well as the Fantasia default and Evergrande’s missed payment, China Fortune Land Development,
which specialises in industrial parks in Hebei province, defaulted
on an offshore bond in February. Fantasia was last week downgraded to
triple C by S&P, which noted “heightened execution risk on repayment” in relation
to the bond due on Monday. Rating agency Fitch said Fantasia had $1.9bn
of offshore bond payments due by the end of next year and as much as Rmb6.4bn ($992m) of onshore
bond payments to make during the same period. The company entered
the market in late August to buy up $6.5m of the note that matured on Monday. But its bonds have
tumbled recently on repayment concerns, with a $250m dollar-denominated bond maturing in December
dropping to $0.38 on the dollar this week. An ICE index tracking China high-yield bonds
is trading at a yield of 17.1 per cent, compared with about 13
per cent in late August. Investors tracking the index have lost 10 per
cent over the past month. Shares in Huarong, China’s biggest
bad debt manager, were suspended for months earlier this year after
the company delayed its financial reports before finally unveiling a record loss in August.
The delays sparked a debate over the extent to which Beijing will
step in to help distressed companies. “Basically they [Evergrande] don’t have
to make any detailed announcement. The announcement could be as simple as,
‘We’re engaging in a potential deal,’ full stop,” Wong said. “There’s basically no timeframe.”
Evergrande, whose shares had fallen more than 80 per cent this year before the trading halt,
has tried for months to raise cash from asset sales to help pay off its
more than $300bn in total liabilities. The Hang Seng Property index tracking major
Hong Kong-listed developers dropped as much as 2.2 per cent on Monday but was flat on Tuesday.