China Debt Crisis Sparked by Evergrande Snares State-Aided CIFI

Published 13 October 2022 10:13:22.250 GMT

(Bloomberg) -- China’s ability to contain a deepening property debt crisis has come under more scrutiny, after a private developer with state backing for funding joined an expanding list of bond defaulters. 

CIFI Holdings Group Co. has failed to pay a coupon due Oct. 8 on a Hong Kong dollar convertible bond on time. The Shanghai-based firm also warned it may face a similar outcome on offshore debt, after blaming a long Chinese public holiday for delaying payments.  

The default is particularly worrying because CIFI was considered a barometer for the broader success of a new rescue effort by Beijing to use state guarantees to help a select group of developers access domestic funding. The builder’s payment struggles also serve as a reminder of the uphill battle that Chinese leaders face to revitalize a key economic engine, as they gear up for a major Communist Party congress starting in three days.        

“It’s just another surprise for investors, who are becoming increasingly skeptical about any private developer,” said Charles Macgregor, head of Asia at Lucror Analytics. “It’s really too late for authorities to support the sector now,” he added, saying confidence among homebuyers and creditors appears “terminally eroded.”

Since a default in December by China Evergrande Group, the nation’s property industry has seen a record wave of bond failures fueled by private developers with limited access to a banking sector dominated by state lenders.  

CIFI’s latest payment setback has extended a selloff in the shares of Chinese developers, with a Bloomberg Intelligence gauge falling as much as 2.6% Thursday and poised for its sixth-straight daily loss. China high-yield dollar notes, dominated by developers, also weakened, according to traders, pushing a Bloomberg index back toward August’s record low.

While the builder’s Hong Kong-listed shares plunged 12%, those of Country Garden Holdings Co., China’s top developer by contracted sales, also slumped 11% in a sign of contagion to even bigger rivals. Country Garden’s 6.5% dollar bond due 2024 was down 3.5 cents at 26.7 cents as of 5:56 p.m. in Hong Kong, according to Bloomberg-compiled prices, on pace for an all-time low. 

The Shanghai-based builder of residential projects and shopping malls failed to deliver interest payment on a 6.95% Hong Kong dollar convertible note originally due Oct. 8, the bond’s trustee said in a notice dated Tuesday to Euroclear, one of the world’s top clearing houses. China Construction Bank (Asia) Corp., the trustee, said the payment miss constitutes an event of default. 

CIFI didn’t respond to Bloomberg News’ request seeking comment. In a Thursday filing to the Hong Kong stock exchange, the company said it has experienced a delay in remittance of cash offshore to meet scheduled interest and amortization payments due to the recent long public holiday in China. 

The developer added that it has been proactively engaging with creditors to address the issue in a bid to reach consensual solutions, adding that its commercial operations remain normal.

However, CIFI also warned that if it doesn’t meet its offshore debt obligations in a timely manner or is unable to implement appropriate consensual solutions with creditors, “events of default may occur.”

Separately, two holders of the Shanghai-based developer’s 4.375% dollar note due 2027 said earlier they have yet to receive coupon payment originally due Wednesday for the note.

The investors asked not to be identified because they’re not authorized to speak about the matter publicly. 
“CIFI’s default on the convertible bond may make investors nervous and spread the concern on other quality private developers that have issued state-backed guarantee bonds,” said Willer Chen, an analyst at Forsyth Barr Asia Ltd. 

CIFI’s convertible bond in question had HK$88 million ($11.2 million) of interest due Oct. 8, while coupon on the firm’s dollar note due 2027 totals $9.14 million, according to data compiled by Bloomberg. The Chinese builder has a 30-day grace period to make the interest payment for the dollar note before an event of default can be declared, according to the note’s offering circular. 

In yet another sign of depressed housing demand, some local governments in China are buying homes in bulk from developers or encouraging state-owned entities to do so in their latest efforts to prop up the real-estate market, the Securities Times reported Thursday. 

Meanwhile, the International Monetary Fund this week painted a bleak picture of how China’s housing slump may morph into a banking crisis. In its global financial-stability report, the IMF’s analysis showed that 45% of developers might not be able to cover their debt obligations with earnings, and 20% of them could become insolvent if their inventory value is marked to current property prices.

In one scenario, 15% of small banks may go under, according to the IMF.

By Alice Huang, Lorretta Chen and Dorothy Ma

--With assistance from Emma Dong, Charlotte Yang and Wei Zhou.