China Evergrande unit’s bonds go on restricted trading after another rating cut

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Trading restrictions were placed on nine onshore bonds sold by the flagship property unit of the troubled China Evergrande Group, after a local credit rating agency slashed the debts’ creditworthiness, deepening the debt woes for the world’s most indebted property developer.

Three yuan-denominated bonds valued at 28.2 billion yuan ($4.4 billion) issued by Evergrande’s Hengda Real Estate Group unit were restricted to negotiated transactions on the Shanghai Stock Exchange, according to a statement.

Six bonds listed on the Shenzhen Stock Exchange, valued at 25.3 billion yuan, were relegated to the high-volume block transactions.

The restrictions were imposed after Hengda Real Estate applied on Thursday to suspend trading of its onshore corporate bonds, after repeated trading freezes of the bonds in recent days by the Shanghai and Shenzhen stock exchanges due to volatile trade.

The suspension came after China Chengxin International downgraded the homebuilder’s bonds to “A”, from “AA”. The ratings downgrade automatically disqualified the bonds from bid-based transactions on the integrated electronic platform in both markets.

“Negotiated transactions and block trading set a higher barrier [for traders], usually seen as a way to protect the average minority investor,” said Zhou Chuanyi, a credit analyst at Lucror Analytics in Singapore. “Offshore investors would take this as a signal to be extremely cautious.”

Notably, troubled conglomerate HNA Group, which is under a government-led restructuring, made similar moves in February, limiting all of its yuan bonds to negotiation and high-volume trading after it entered bankruptcy restructuring.

The trading restrictions indicate deepening woes for the embattled China Evergrande Group as it struggles for capital to extricate itself from its $300 billion of total liabilities.

The company’s most active yuan-denominated bonds due in July 2022 have declined to distressed levels, valued at 0.27 yuan on the yuan, from 0.83 yuan three months earlier when Evergrande’s latest debt woes began.

The panic on Evergrande’s debt was triggered on July 19, when the Yixing branch in Jiangsu province of China Guangfa Bank froze 132 million yuan of the developer’s onshore deposits to recover a loan. The developer eventually repaid its borrowing and averted the crisis, only to stumble into another.

Evergrande faces a key liquidity test next week when it is due to pay $83.5 million in interest payments on September 23 for a dollar-denominated note, in addition to 232 million yuan for a renminbi note, according to data compiled by Bloomberg.

The company’s fortunes had not been helped by Chengxin, which put Evergrande and its bonds on a watch list for further downgrades, after slashing their ratings.

S&P Global Ratings on Wednesday downgraded Evergrande’s credit rating to the junk status of “CC”, implying that the company’s bonds are of “very high risk”, non-investment grade.

“The liquidity and funding access of China Evergrande Group are shrinking severely, as shown by an announced material drop in sales, a fall in the cash balance, and the continued use of physical properties to settle payments,” S&P said. “The company may not be able to service debt in time, which will lead to a default scenario including the possibility of debt restructuring.”

Worries over possible contagion from Evergrande’s debt crisis have spilled over to other Chinese high-yield issuers. An index of Chinese high-yield dollar debt fell to 374.646 on Thursday morning, its lowest level since April 14, 2020.