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China property default risk for Fantasia, Sinic amid Evergrande crisis

A pedestrian crosses a road in front of residential buildings in Beijing, China.

Qilai Shen | Bloomberg | Getty Images

On the heels of Evergrande’s debt crisis, there are increasing signs of stress in China’s property market after one developer failed to make a bond payment on Tuesday.

Ratings agencies have downgraded Chinese developers Fantasia Holdings and Sinic Holdings over risks from their strained cash flow situations.

Fantasia did not repay a bond that matured on Monday, it said in a filing to the Hong Kong exchange.

The firm has halted trading of its shares since Sept. 9 until further notice, it said. Those shares have plummeted nearly 60% year-to-date.

Evergrande contagion fears

The fallout from Fantasia, however, would be far smaller compared to Evergrande.

Evergrande is the world’s most indebted property developer with liabilities of $300 billion, while Fantasia has total liabilities of 82.9 billion yuan ($12.8 billion), according to its first-half financial statement.

We believe the existence of these bonds means that the company’s liquidity situation could be tighter than we previously expected.

Fitch Ratings on Monday said it downgraded Fantasia to “CCC-” from “B,” saying the firm’s cash flow situation “could be tighter than we previously expected.” According to its website, “CCC” means “substantial credit risk,” with a “real possibility” of default. “B” rating means material default risk is present, but a limited margin of safety remains.

In a report released before the company’s filing on Monday night, Fitch highlighted the existence of a private bond that was not disclosed in the firm’s financial reports, and said Fantasia had made a late payment of $100 million due on this bond.

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“We believe the existence of these bonds means that the company’s liquidity situation could be tighter than we previously expected. The late payment also raises doubts about the company’s ability to repay its maturities on a timely basis,” Fitch wrote.

“Furthermore, this incident casts doubt on the transparency of the company’s financial disclosures,” it added.

China’s property sector has come under the spotlight since the debt problems of Evergrande surfaced.

Evergrande — the second-largest developer in China by sales — has warned twice it could default, setting off investor worries. It missed interest payments on two U.S.-dollar offshore bonds so far, and has been scrambling to raise cash to pay suppliers and investors.

Other developers have also been scrambling for cash, signaling further distress in the sector.

Guangzhou R&F is another real estate developer on the radar of investors. It said last month it was raising as much as $2.5 billion by borrowing from major shareholders and selling a subsidiary, according to Reuters.

Fitch revised its outlook from stable to negative last month, citing its limited access to funding amid ongoing refinancing needs.

Industry watchers have been concerned about the fallout and possible contagion from the Evergrande crisis hitting China’s growth. The real estate sector in China accounts for as much as 15% of the Asian giant’s gross domestic product, according to analyst estimates.

Many Asian high-yield bond funds are also dominated by Chinese real estate developers.

Returns for the ICE Bofa High Yield Asia Emerging Markets Corporate Plus index have plummeted to -9.89% year-to-date, according to data from Refinitiv Eikon.

Sinic likely to default

S&P Global Ratings on Tuesday morning downgraded Sinic Holdings from “CCC+” to “CC.”

According to the agency’s website, “CCC” means the firm is currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments. “CC” means the firm is highly vulnerable. While default has not yet occurred, it is expected to be a virtual certainty.

“We lowered the rating because we believe Sinic has run into severe liquidity problem and its debt-servicing ability has almost been depleted,” S&P wrote.

The ratings agency said that the Chinese developer is like to default on its $246 million offshore dollar-denominated bond due Oct. 18. Sinic’s local subsidiaries have already failed to make $38.7 million in interest payments on two onshore yuan-denominated bonds that were due Sept. 18, S&P said.

Sinic has total liabilities of $14.2 billion, its first-half financial statement showed. Shares of the Chinese real estate developer have been halted since Sept. 20.

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