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Chinese property bonds, shares slump on Evergrande crisis

Chinese property bonds

Evergrande is facing one of the country’s largest defaults as it wrestles with more than $300 billion of debt

Bonds and shares issued by Chinese property developers slumped on Friday as onshore markets returned from a week-long holiday with few clues as to how regulators propose to contain the contagion from cash-strapped China Evergrande Group’s debt problems.

Evergrande, whose shares remain suspended since it requested a trading halt on Monday pending a major transaction announcement, is facing one of the country’s largest defaults as it wrestles with more than $300 billion of debt.

The company last month missed coupon payments on two dollar bond tranches and faces three more early next week totalling nearly $150 million. The possible collapse of one of China’s biggest borrowers has triggered worries about contagion risks to the property sector in the world’s second-largest economy, as its debt-laden peers are hit with rating downgrades on looming defaults.

That uncertainty battered bonds issued by property firms such as Kaisa Group, Central China Real Estate and Greenland over China’s National Day break.

On Friday, onshore bonds caught up to the selling. The Shanghai Stock Exchange suspended trading of two bonds issued by smaller developer Fantasia Group China Co, with one dropping more than 50%, after controlling shareholder Fantasia Holdings Group missed the deadline on a $206 million international market debt payment on Monday.

Typically, a default by a small firm will be viewed as idiosyncratic. However, given tight liquidity for many Chinese developers now, market participants are questioning if this may be a precursor for voluntary defaults by other developers with healthy short-term liquidity positions, but large unsustainable longer-term debt, Chang Wei Liang, Credit & FX Strategist at DBS Bank, said in a note.

In a statement on Thursday evening, Fantasia Group said its operations were normal and it was maintaining close contact with investors. It also said it was actively promoting debt service protection measures.

Worries around Evergrande contagion also hit mainland share prices, pulling an index tracking the property sector down 1.75% in afternoon trade, against a rise of around 1% for blue-chip shares.

In Hong Kong, the Hang Seng Property and Construction index dropped more than 0.6%, versus a 0.1% drop for the broader Hang Seng index.

Bloomberg reported on Thursday that some dollar bondholders were invited by advisers to a call on Friday 1030 GMT to discuss strategy and how to broaden the group.

Furthermore, Evergrande dollar-bond trustee Citi has hired law firm Mayer Brown as counsel, according to a source familiar with the matter. Citi and Mayer Brown declined to comment.

A group of bondholders previously selected investment bank Moelis & Co and law firm Kirkland & Ellis as advisers on a potential restructuring of a tranche of bonds, two sources close to the matter said in September.

Chinese regulators have not made any comments specifically on Evergrande during the week-long holiday from Oct. 1, although the central bank last Wednesday urged financial institutions to co-operate with relevant departments and local governments to maintain the stable and healthy development of the property market and safeguard housing consumers’ interests.

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