Fitch Ratings has downgraded Chinese homebuilder China Evergrande Group to 'Restricted Default' (RD) status due to non-payment of offshore bond dues.
The revised rating from 'C', the Long-Term Foreign-Currency Issuer Default Ratings (IDR) covers Evergrande Group and its subsidiaries, Hengda Real Estate Group and Tianji Holding.
Fitch affirmed the senior unsecured ratings of Evergrande and Tianji at 'C', with a Recovery Rating of 'RR6', as well as the Tianji-guaranteed senior unsecured notes issued by Scenery Journey Limited at 'C', with a Recovery Rating of 'RR6'.
The downgrades reflect the non-payment of coupons due 6 November 2021 for Tianji's USD645 million 13% bonds and USD590 million 13.75% bonds after the grace period lapsed on 6 December.
The non-payment is consistent with an 'RD' rating, signifying the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a material financial obligation.
Key ratings drivers
Non-Payment of Coupons: There has been no announcement from the company or the trustee regarding the coupon payments due 6 November for the two Tianji bonds after the grace periods lapsed. In addition, the company did not respond to our request for confirmation on the coupon payments. We are therefore assuming they were not paid.
Failure to make coupon payments within the grace period is consistent with Fitch's definition of an 'RD' rating, as the company has experienced an uncured payment default on a material financial obligation but has not yet entered into bankruptcy filings, administration, receivership, liquidation, or other formal winding-up procedures, and has not otherwise ceased operating.
Cross Default with Notes: Tianji is a restricted subsidiary of Evergrande, and the non-payment has triggered an event of default on Evergrande's bonds. As a result, Tianji and Evergrande's other US dollar notes will become due immediately and payable if the bond trustee or holders of at least 25% in aggregate principal amount of the offshore notes declare so.
Uncertainty over Restructuring Plan: Evergrande announced on 6 December the formation of a Risk Management Committee that comprises the company's senior management, representatives from Guangzhou state-owned enterprises, such as Guangdong Holdings Limited and Guangzhou Yuexiu Holdings Limited, as well as representatives from financial institutions such as China Cinda Asset Management Co., Ltd. (A/Stable), to mitigate and eliminate the group's future risks. There is limited information available on the company's restructuring plan at this stage.
Derivation summary
Evergrande, Hengda and Tianji's IDRs were downgraded to 'RD' in line with its definition of an uncured payment default but there has been no initiation of bankruptcy filings, administration, receivership, liquidation, or other formal winding-up procedures as yet with business operations continuing.
The recovery analysis assumes that Evergrande would be liquidated in a bankruptcy because it is an asset-trading company. We assume both Hengda and Evergrande would go into bankruptcy if Evergrande defaults.
Fitch has assumed a 10% administrative claim.
Liquidation approach
The liquidation estimate reflects Fitch's view of the value of balance-sheet assets that can be realised in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
- 60% advance rate applied to net inventory given EBITDA margin of below 20%
- 70% advance rate applied to trade receivables, which mainly arose from sales of properties; 87% of trade receivables are within 90 days
- 60% advance rate applied to property, plant and equipment (PPE), which mainly comprise buildings and construction in progress
- 10% advance rate applied to investment properties based on a conservative 6.5% cap on annualised rental income.
- 100% advance rate applied to available cash, but we have also added trade payables to the liability waterfall
Fitch excluded restricted cash as there is no breakdown on how much can be used for debt repayment. The amount is immaterial.
"We excluded investments in joint ventures of CNY88 billion, which mainly include stakes in non-property businesses that could be illiquid, such as CNY30 billion for its 36% stake in Shengjing Bank and CNY18 billion for its 50% stake in Evergrande Life Insurance based on end-2020 breakdown. We note that the company sold a 19.9% stake in Shengjing Bank for around CNY10 billion in September 2021, but the proceeds were used to settle onshore loans from the bank.
"We estimate Evergrande's liquidation value by deconsolidating Hengda, Evergrande Auto and Evergrande Property Services. We estimate the residual value of Hengda and Evergrande Auto by assuming they will be liquidated as they are asset trading businesses (Evergrande Auto's electric-vehicle business remains loss-making). We expect the residual values of Hengda and Evergrande Auto to both be zero after paying off their own debt.
"We estimate the residual value of Evergrande's stake in Evergrande Property Services based on the going-concern approach. We applied a 4x enterprise value/EBITDA multiple and our estimated recovery value is at a 14% discount to the market value on 8 December, or 20% discount to the price that was agreed on for the disposal of the stake to Hopson Development Holdings Limited (B+/Stable) in October that was subsequently cancelled.
"The allocation of value in the liability waterfall results in recovery corresponding to 'RR6' for the senior unsecured notes."
