China’s real estate sector faced its first dollar bond default after China’s Evergrande Group sank deeper into its crisis in recent weeks, raising investor fears about other highly leveraged borrowers and about global contagion.
Fantasia Holdings, which develops luxury apartments and urban regeneration projects, failed to repay a $205.7 million bond maturing on Monday. This led to a wave of ratings downgrades late on Tuesday to levels indicating default.
Creditors are now scrutinizing debt repayment dates as they try to discover the next problem points that may arise in the increasingly stressed real estate industry.
The stumble sparked wider concern in volatile markets during a public holiday week in China and amid uncertainty over Evergrande, one of the country’s largest property developers and the largest issuer of non-investment-grade bonds in Asia. The average price of Chinese high-yield dollar-denominated bonds fell 1.3 cents on Tuesday, the worst drop since July, according to Bloomberg. Shares of real estate developers also fell, with shares of Sunak China Holdings and China Aoyuan Group down at least 10% on Tuesday.
Chinese authorities have maintained strict rules on leverage, while housing market calming measures have dampened sales. Recent days have brought more examples of stress at other real estate firms, as Scenic Holdings Group received a request to repay some debt after missing two domestic interest payments. Trouble has already accumulated several months ago. Sunshine 100 China Holdings defaulted on dollar bonds in August.
While Fantasia poses less risk than Evergrande to broader markets due to its small size – it ranked 60th on the list of contract sales in the first quarter versus Evergrande’s third, this builder’s crisis has defined many Of the risks that increasingly burden the minds of investors.
Ambiguous debt in the sector is one of the main concerns, and warnings have been raised in recent days when insiders said there is a widely unknown dollar bond with an official maturity date of October 3 that is issued by an entity called Jumbo Fortune Enterprises with a guarantee “Evergrand”.
In the case of Fantasia, the company said just several weeks before the default that its operating performance was good, it had sufficient working capital and no liquidity issue. But she raised concern about the hard-to-find commitments last week when she rebutted a report that privately raised bond funds had not been transferred.
These private placement bonds were backed by the company, but the company’s financial reports do not appear to have disclosed them, although the real estate developer said it had prepared the funds to pay the remaining $50 million of the outstanding securities in early October, Fitch said in a report on May 4. October: “We believe that the presence of these bonds means that the company’s liquidity position may be narrower than we previously expected.”
A quick reversal appeared on the credit market. The dollar bond price indexes, which faltered this week, rose to 98 cents last week only. In international debt markets, notes are rarely referred to in this way when their due date approaches. Other Fantasia bonds due in December and beyond are already in crisis.
October 15 is one of the dates investors are focusing on, when Beijing-based Qinyuan Real Estate must repay the $229 million owed in dollar bonds. Fitch downgraded the company by one notch to CCC last month, citing “increased refinancing risks” at the company’s next maturity in October.
Here is a summary of “Fantasia” rating changes that occurred late Tuesday in Asia:
Standard & Poor’s lowered the credit rating of its long-term issuer “Fantasia” from CCC to selective default, which also lowered the level of securities maturing on Monday to D.
Fitch has lowered its long-term default rating of the foreign-currency bond issuer from CCC to the level of restricted default, and said there is no grace period on the bond.
Moody Investors Services downgraded the company’s family rating from B3 to Ca.
There was no immediate response from Fantasia on Wednesday to a request for comment on its debt repayment plans.