One of these days, someone will finally put China’s largest and most indebted property developer, Evergrande – which has been teetering on the verge of insolvency for months – out of its misery. While that day is not here yet, Fitch just hammered another nail in the coffin of “China’s Lehman” with a 3-notch downgrade which saw the company’s long-term foreign currency issuer rating drop from CCC+ to CC (D is just one letter away), and which saw the rating agency say that “default of some kind appears probable” as the company struggles to address its worsening liquidity issues.
“We believe credit risk is high given tight liquidity, declining contracted sales, pressure to address delayed payments to suppliers and contractors, and limited progress on asset disposals,” Fitch said in a statement.
The Fitch downgrade came a day after Moody’s also cut Evergrande’s credit rating by three notches to Ca, which implies it is “likely in or very near default.” The conglomerate’s liquidity and default risk is “heightened,” Moody’s said in its third downgrade of the real estate giant since June.
Of course, the rating agencies are late to the party: as we noted last week, Evergrande itself warned of default risks if its efforts to raise cash fall short. Its cash coverage to short-term borrowings worsened in the first half to 36% from 47% from six months earlier, according to Bloomberg calculations based on an earnings statement. The company hasn’t sold a dollar bond since January last year.
The stock dropped 2.8% to HK$3.47 in Hong Kong trading, sliding below the 2009 IPO price of HK$3.5. Shares of the troubled developer have tumbled about 77% this year, while many of its dollar bonds are hovering below 30 cents.
And speaking of an Evergrande default, one may have already taken place: earlier on Wednesday, Chinese paint producer Skshu said Evergrande has 101.7 million yuan of overdue commercial bills as of Aug. 31. At this point it’s just a question of when Beijing decides to pull the plug.