Investors are waiting for news about tens of millions of dollars of overdue interest payments owed by Chinese Property Developers Evergrande and Kaisa. The firms both appear to be overdue on payments to bond holders. Evergrande’s shares closed at a new record low on Wednesday after falling by 5.5% in Hong Kong trade.
If, Evergrande did fail to make these payments on time, the stage could be set for a massive default by the world’s most indebted property developer. It could trigger “cross default” on Evergrande’s roughly $19bn of international bonds, putting it at risk of becoming China’s biggest defaulter.
A cross default is a provision in a bond or loan agreement that puts a borrower in default if they default on another obligation. Fears about Evergrande’s future and the impact of its potential collapse have been looming over the world’s second-largest economy for months.
There are some precedents for what is going on in this situation. The Chinese government has taken control of other heavily indebted companies through similar mechanisms in recent years, the best example being HNA Group, which was effectively taken over by local government officials early last year. HNA’s insolvency is the biggest bankruptcy that China has seen since introducing its first bankruptcy law in 2007. A bankruptcy of this size is to a certain extent uncharted territory as less than 100 listed companies have ever gone through bankruptcy proceedings in China.
Additionally, trading in shares of embattled property developer Kaisa was suspended in Hong Kong. In an announcement to the Hong Kong Stock Exchange Kaisa did not give a reason for the halt in trading. However, it came after reports that Kaisa was unlikely to be able to meet a $400m offshore debt deadline on Tuesday.
Kaisa is China’s biggest holder of offshore debt among developers after Evergrande.
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