Kaisa Group Holdings Ltd. became China’s first real estate company to default on its U.S. currency debt, capping a month of distress in bond markets amid an anti-corruption probe and fueling concern that losses will spread.
The default coincides with the expiration of a 30-day grace period on $52 million of missed interest payments on two dollar-denominated bonds, according to a Hong Kong stock exchange statement Monday. Kaisa, based in the southern city of Shenzhen, is struggling to service 65 billion yuan ($10.5 billion) of debt owed to both onshore and offshore lenders while becoming embroiled in President Xi Jinping’s crackdown on graft.
The developer’s problems have rippled across the region’s debt market, where investors starved of yield elsewhere in the world have swooped in to boost returns. As the government’s anti-corruption probes widen, it’s raising concern that defaults will spread after overseas noteholders bought a record $21.3 billion of bonds issued by Chinese property companies.
“It’s been a canary that has been chirping for some time,” Gary Herbert, a money manager who helps oversee about $45 billion of fixed-income assets at Brandywine Global Investment Management LLC in Philadelphia, said in a telephone interview. “This is the beginning of an adjustment period in China that will see a lot of credit investors, who were chasing the promise of higher yields, ultimately disappointed.”
Kaisa’s default follows the surprise return of founder Kwok Ying Shing last week. The developer’s woes started late last year when the Chinese government blocked approvals of its property sales and new projects in Shenzhen, said to be linked to an investigation of the city’s former security chief Jiang Zunyu.
Kaisa “is focused on facilitating the release of its 2014 audited financial results,” according to its statement. Following that release, the company “will continue its efforts to reach a consensual restructuring of its outstanding debts.”
The company’s $800 million of 8.875 percent bonds due in March 2018 fell about 7 cents to 55.3 cents on the dollar as of 10:11 a.m. New York time Monday, according to prices compiled by Bloomberg. That’s the lowest in more than a month. Standard & Poor’s had already downgraded Kaisa to default last month.
Kwok exited the company he founded more than 15 years ago on Dec. 31, citing health reasons. Kaisa said in a Hong Kong stock exchange filing April 13 that he’d been appointed chairman and executive director.
In the interim, rival Sunac China Holdings Ltd. agreed to buy a controlling 49.3 percent stake from the Kwok family on Jan. 30, subject to a debt restructuring that would require investors to accept lower coupons and defer repayment by up to five years. Kaisa has said offshore creditors would stand to recover just 2.4 percent in a liquidation.
Kaisa last month postponed its results announcement for 2014, saying that auditors needed more time to verify its accounts. There may be a “significant adjustment” to the figures, the company said on March 31 without saying when the results would be released.
The earnings and profitability of some Chinese property developers may deteriorate further in 2015 and more defaults can’t be ruled out, S&P said in a report Friday. It said developers’ annual results for 2014 indicate many are in “significantly worse” shape than the previous year.
Moody’s expects Chinese builders’ results to stabilize this year on looser regulation and more cautious expansion, the ratings company said in a Friday report.