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Major announcement for teetering Evergrande

·2-min read
China's Evergrande is teetering on the edge of collapse. (Source: Getty)
China's Evergrande is teetering on the edge of collapse. (Source: Getty)

Embattled Chinese property developer Evergrande has been declared in ‘restricted default’ by Fitch Ratings, as it struggles to overcome AU$420 billion in debts.

The American credit agency issued the rating on Thursday, noting the rating reflected the company’s continuing failure to meet its financial obligations, without sliding into bankruptcy.

China’s second-largest developer missed its Monday deadline to repay $82.5 million in bond coupons. The Monday deadline represented the end of a grace period, with the payment initially due a month ago.

Fitch said Evergrande’s silence about the payment indicated the payments had not been made.

Its decision to cut the rating makes Fitch the first ratings agency to declare Evergrande in default.

Evergrande’s troubles have seen its stock shed 87 per cent so far this year.

The company is the most high-profile casualty of the Chinese government’s decision to crack down on excessive borrowing as it moves to curb housing price growth. Evergrande is responsible for more than 1,300 projects across 280 Chinese cities, with the company heavily indebted to complete the projects.

Fitch also confirmed another Chinese property company, Kaisa, had defaulted on $400 million in bonds.

“Evergrande has been prominent in the news for some time, and the reports of official default will renew concerns about whether a successful restructure can be carried out,” Doron Peleg, CEO of national property buyers agents’ network BuyersBuyers, said.

“The dynamic is likely to be different from when Lehman collapsed, because Evergrande and Kaisa are property developers rather than an investment bank, and there is also likely to be a significant government intervention as authorities scramble to contain the fallout.”

However, there remains a question of what the larger global fallout will look like, he added.

With rates at record lows, cascading issues from a potential Evergrande and Kaisa collapse could keep them lower for longer, he suggested.

“It’s quite possible that Chinese debt defaults could damage confidence in financial markets globally, particularly if there is a growing fear of contagion,” Peleg said.

“However, generally speaking, the experience in Australia is that domestic factors will have a far more material impact on housing market sentiment and trends, and sentiment is very positive in housing.”

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