InvestorQ : What is the latest on the emerging story on Evergrande of China?
Rutuja Nigam made post

What is the latest on the emerging story on Evergrande of China?

5 months ago

With the situation of two major realty companies in China, Evergrande and Kaisa, steadily deteriorating, Fitch has downgraded property both Evergrande and Kaisa to “Restricted Default” status. Incidentally, Evergrande had defaulted on offshore bonds while Kaisa was working on restructuring its $12 billion worth of offshore debt.. Both are trying to hammer out restructuring of debt with the lenders.

If Evergrande officially defaults, it could put at risk nearly $300 billion in loans and liabilities and considering its close association with other realty companies in the region, the cascading effect could be quite strong. Other Asian markets are also fearing hardening yields, spike in risk premium and a compression in the market of low rated high yield bonds across the emerging market segment in Asia, Easter Europe and Latin American.

The key factor to watch would be the role that the People’s Bank of China (PBOC) would play to alleviate fears in the market. PBOC governor had assured that the rights of Evergrande shareholders and creditors would be fully respected based on legal seniorities. He also ruled out any contagion effect, but these can hardly be predicted. Such a default is also likely to seriously undermine Hong Kong’s capital market.

The Restricted Debt category refers to debt where the issuer has experienced default but has begun winding-up processes such as bankruptcy filings. However, this is considered to be the penultimate step before an actual default. In the cases of Evergrande and Kaisa, the worry is about servicing their debt obligations falling due in the next few quarters.