Default looms larger for Evergrande

The main unit of China Evergrande Group (3333), Hengda Real Estate Group, applied yesterday to suspend trading of its onshore corporate bonds while rating agency S&P said it is almost certain that the developer will default.

Hengda received notice on September 15 from rating agency China Chengxin International that the bonds’ ratings had been downgraded to A from AA, and that the bonds rating and its issuer rating were put on a watch list for further downgrades, it said in a stock exchange filing.

Trading suspensions are relatively common in China’s domestic debt market following credit rating downgrades because a score below AA requires bonds to be traded via bid-ask and block platforms, rather than auctions. That prevents smaller investors, some of whom already can’t buy Evergrande’s local notes, from making speculative investments.

S&P this week further downgraded Evergrande to “CC” from “CCC,” with a negative outlook, citing reduced liquidity and default risks, including the possibility of debt restructuring. Fitch said a default could expose many sectors to heightened credit risk.

Share prices of Evergrande and its sister companies continued to plunge. The group’s shares dropped 6 percent to a historical low of HK$2.63. Evergrande New Energy Vehicle (0708) tumbled 11 percent to a nearly one-year low of HK$3.53. Evergrande Property Services (6666) also fell by 3 percent.

Ding Yumei, the wife of Hui Kayan, Evergrande chair and formerly China’s richest man, paid 20 million yuan (HK$24.1 million) for the company’s high-yield investment products on July 8, says a purchase document shown by a senior executive to investors this week, the Financial Times reported.

Chinese Estates Holdings (0127) chief executive Kimbee Chan Hoi-wan, wife of Joseph Lau Luen-hung, offloaded shares of Evergrande last Friday, cashing in HK$87.5 million, the second time in less than a month.

Altogether, she sold shares worth HK$472 million and her stake in the company fell to 7.96 percent from 8.15 percent.

Authorities have begun laying the groundwork for a possible debt restructuring, assembling accounting and legal experts to examine Evergrande’s finances, while telling lenders not to expect interest payments due next week.

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