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One of Asia’s behemoth property developers, China Evergrande Group (HKG: 3333) has reportedly slipped into default on the payment of the next tranche of its debts.
According to a CNBC report citing an update by Fitch Ratings, the company has not made its characteristic late-hour debt servicing repayments as of Thursday, triggering a concerning default.
The shares of the embattled firm which is owing over $300 billion in total liabilities plunged 1.67% to 1.77 Hong Kong Dollars as of late trading hours on Friday. The company’s inability to repay its debts did not come as a shock going by the latest trends that hinted at this possibility, however, what is surprising is the fact that major ratings outfits are keeping quiet about this default.
Of the hoard of property developers facing financial crises in the Asian country, China Evergrande is the most indebted with over $19 billion owed to overseas creditors. The fact that the company and other vocal parties are refusing to call out this default has been seen as an avenue for the company to restructure its debts at much lower costs, details of which are not yet clear.
“We should have been calling this a technical default for a long time already, but nobody dared,” Alicia Garcia-Herrero, Natixis’ chief economist for Asia-Pacific, said Friday.
“China is not making it clear because there’s no pressure to make it clear,” she said. “Ratings [agencies] should be pushing. Some investors did push. Nobody wants to label this because they don’t want to bear the consequences. Everybody’s trying to increase what they can get out of it.”
Calling the default for what it truly is can trigger a host of financial consequences in China, most of whom are billed to spread out beyond borders into the global markets.
What if the China Evergrande Debt Default is a Good Sign?
It is no news that the majority of businesses are struggling to keep their heads above the waters in the wake of a series of waves of the coronavirus pandemic. The People’s Bank of China (PBoC) has notably taken a tactical approach to handle the China Evergrande crisis with President Yi Gang saying in a speech on Thursday that the company’s struggles are a “market event” and will be handled as such.
But what if the whole crisis is a good point on the need to restructure the debt ecosystem for other companies to manage their own debt obligation appropriately?
“Our view on the Evergrande situation is that ultimately, that’s an extremely healthy development, because there needs to be a … [worked-out] precedent for companies to restructure their liabilities for it to be a truly functioning credit market,” Jason Brady, president, and CEO of Thornburg Investment Management said on a media call Wednesday.
With the default from China Evergrande, all eyes are now on the firm to see if it would be able to meet up with the obligations to continue the developments of the properties it has sold out. The company’s financial situation is a global concern, and the parties involved in handling the situation are aware of this, hence, the need to proceed with caution.