Chinese developer Sinic defaults amid Evergrande contagion

HONG KONG (BLOOMBERG) – Sinic Holdings Group has become the latest Chinese real estate firm to default as investors wait to see whether China Evergrande Group will meet overdue interest payments on dollar bonds this week.

Sinic’s credit rating was lowered by S&P Global Ratings to “selective default” from “CC” after the company failed to repay the interest and principal of its US$250 million (S$336 million) note due on Monday (Oct 18), according to a statement dated Tuesday.

Sinic warned earlier this month that it did not expect to repay the United States dollar bond and that may trigger cross-default on its two other notes.

The news follows a surprise default by developer Fantasia Holdings Group earlier this month. China’s real estate market has been rocked by a crisis at Evergrande, as the authorities try to cut leverage in the sector and prevent a bubble.

“We expect this non-payment to trigger cross defaults and accelerate demands for repayment of the company’s other debts, including its US dollar bonds and domestic loans, some of which are already overdue,” S&P Global said in the statement.

Sinic is much smaller than Evergrande, ranking 41st in a list of China’s biggest property developers by contracted sales as at August, compared with its bigger peer at third. Sinic has US$694 million in dollar bonds outstanding, according to data compiled by Bloomberg. The firm missed domestic payments in September.

A 30-day grace period for Evergrande to meet interest payment deadlines on several dollar bonds will end this week, raising the spectre of the real estate giant defaulting.

The strain on real estate companies adds to a string of broader risks for China’s economy, which depends on the real estate market for about 30 per cent of gross domestic product. Home prices fell in September for the first time in six years, while real estate investment slid for the first time since last year.

A government clampdown on the property industry is making it harder for companies to refinance and threatening to create a wave of defaults. The yield on junk dollar bonds from the nation’s borrowers climbed to a decade-high of about 20 per cent this month before dropping to 17 per cent.

Shares of both Sinic and Evergrande are suspended from trading in Hong Kong. A gauge of Chinese real estate company stocks fell 0.3 per cent to trade near a three-year low.

A senior official with the International Monetary Fund (IMF) said risks to China’s economy from an Evergrande meltdown are “contained” for now.

“People understand that the government has the tools to contain the risks going forward,” IMF’s China mission chief Helge Berger said on Bloomberg Television.

Risks in the property industry are contained to the sector at the moment, but the authorities should keep monitoring in case they escalate, he said on Wednesday.

Beijing finally broke its silence on Evergrande’s trouble last Friday and reiterated over the weekend that the risk can be contained. But analysts from Citigroup said in a note on Monday that “more decisive policies are still needed to shore up market confidence in the property sector”.

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