Evergrande officially defaults, downgraded by Fitch. What next?

Fitch has downgraded Evergrande after it reportedly defaulted.

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The giant Chinese real estate developer Evergrande has officially defaulted, according to reports. In response to that, the ratings agency Fitch has downgraded it.

Evergrande defaults

Reporting by Bloomberg said that Evergrande bondholders are going to face "deep haircuts" through a restructuring that may take months or even years to resolve.

Chinese officials have reportedly made it clear that Evergrande is not going to be bailed out. People's Bank of China Governor Yi Gang said in a video message that the situation is a "market event that should be dealt in a market-orientated way".

Evergrande has been struggling with over $300 billion of debts that it has been missing just the interest repayments on.

At the end of last week, Evergrande told the market in an announcement that it had received a demand to perform its obligations under a guarantee for an amount of around US$260 million. If Evergrande was unable to meet its guarantee obligations or certain other financial obligations, it could lead to creditors demanding an acceleration of repayment.

Evergrande admitted there was no guarantee that the group will have sufficient funds to continue to perform its obligations. It said it was going to work on a viable restructuring plan.

However, in anticipation of potential problems, authorities have reduced lender reserve requirements, eased real estate rules and introduced measures to make sure that higher-rated developers can still get funding. Authorities may decide to prioritise "social stability" when deciding who gets their money back.

Fitch weighs in on Evergrande

The ratings agency Fitch has downgraded Evergrande to "restricted default" after failing to make two interest payments by the end of the grace period this week.

This reportedly may mean that it activates cross defaults across $19.2 billion of debt.

Fitch said it was unable to get confirmation that this week's payments were made, so it assumed they were not paid after bondholders reported not receiving their money.

Some of the bond investors that Bloomberg spoke to expect that they will be at the back of the queue in getting their money back, if at all. Some of the world's biggest investment groups may have been trapped in this, including Blackrock, UBS and Allianz.

Other Chinese developers problems

Evergrande isn't the only one that seems to have officially defaulted. Kaisa Group reportedly missed repaying a $400 million bond that matured earlier this week.

Fitch has also cut the rating of Kaisa Group to "restricted default".

Bloomberg reported that those two companies alone account for around 15% of outstanding dollar bonds sold by Chinese developers.

What next?

It was speculated by Brock Silvers, chief investment officer at Kaiyuan Capital, that due to the fact that the company is in China, the default won't lead to an immediate collapse or even a big impact because the Chinese government is in charge of the situation, not the bondholders.

He Jun, a researcher at independent strategic group Anbound Consulting, said to Bloomberg that one potential roadmap could be seen with HNA Group. With HNA, the local government took over running of the business and then 12 months later went into a court-led restructuring.

The S&P/ASX 200 Index (ASX: XJO) is down 0.4% at the time of writing. Only today's transacting investors know how much they are taking the Evergrande news into account with this decline.

Looking at the ASX's two biggest miners, BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), they are down 0.6% and up 0.4% respectively.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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