Kaisa default triggers broader loan worries

Concerns mount of a cross default on the Chinese property group's bonds and broader worries over bank exposure to the Chinese property sector.

Chinese property developer Kaisa's default on a HK$400 million ($51 million) loan with HSBC has given lenders further reason to fret about their exposure to China's fragile property sector.

With home sales slowing and liquidity conditions tight for developers, the Chinese government threw the property sector a helping hand in November by cutting interest rates.

But Kaisa's default shows Chinese developers are by no means out of the woods.

“It’s a worry to lenders. It shows what’s happening to the real estate sector in China," one Hong Kong-based senior loan banker at a foreign bank told Finance Asia.  "I think we are going to see this happen to a lot more developers.”

Kaisa's woes were compounded by the recent resignations of key senior executives, including its chairman, vice chairman and chief financial officer in December. In particular, the resignation of Kwok Ying Shing, the company's erstwhile chairman, triggered a mandatory prepayment provision under the HSBC facility agreement, which meant that the company needed to repay the loan on December 31.

Kaisa said in a January 1 exchange filing that it had failed to repay the HSBC facility and that it is assessing the impact of the default on other loan facilities, debt and equity securities.

Standard & Poor's on Monday downgraded Kaisa's credit rating to SD from BB- while Moody’s downgraded Kaisa to Caa3 from B3, highlighting the risk of cross defaults on Kaisa's other outstanding debt. 

"The rating downgrades reflect Kaisa's heightened default risk following the default on its HSBC loan, which in turn will likely trigger a cross-default on its offshore bonds," Franco Leung, a Moody's vice president and senior analyst, said in a report on Monday.

As of January 2015, Kaisa's outstanding offshore bonds amounted to $2.5 billion including renminbi convertible bonds. This includes the $400 million dollar bond that Kaisa sold in June last year.

Kaisa's default comes as more Chinese property firms tap offshore lenders for funds. According to data provider Dealogic, US dollar loans issued by Chinese property borrowers rose four-fold to $4.6 billion in 2014 compared with 2010.

Analysts expect lenders to turn more cautious now on lending to the sector. "Banks are likely to increase the scrutiny of loans they release to Chinese real estate developers,” Chris Yip, an analyst at S&P covering the real estate sector, said.

Lack of information

For now, it is a case of wait and watch for investors and lenders. Kaisa's stock has been suspended from trading since December 29 and there has been little information from the company since news of its loan default on January 1.

Kwok, Kaisa's founder, resigned as chairman on December 10 citing health reasons. As of January 1, he and his family members owned 49.3% of the company.

The company’s vice chairman Tam Lai Ling and CFO Cheung Hung Kwong both resigned subsequently on December 29.

According to one Hong Kong-based bond investor who declined to be named, there has been no communication from the company.  "We are not able to get hold of the company," he said.

"At the moment, the financial market will be shut off from them as there is no clarity on how they will liaise with the government over restrictions on Shenzhen projects, or the imminent risk of cross defaults. There is a lot they need to answer for," the investor said.

Kaisa has faced restrictions over the sale of properties in Shenzhen, which contributes to more than a fifth of the company's sales budget.

The investor added that outstanding Kaisa bonds have been hovering around the mid-40 levels on Monday and have traded flat across the curve.

Ratings analysts, similarly, are still waiting for further clarity. "We are awaiting more information from the company. Kaisa has declared a default but has not indicated how it will resolve the problem," said S&P's Yip.

On Tuesday morning, Kaisa provided investors with more bad news. In an exchange filing, it said that partners for two urban redevelopment projects in China have alleged that Kaisa has breached cooperation agreements and want to terminate the agreement and demand a refund of Rmb1.2 billion ($192 million) in fees. A lender affiliated with the project partners has also declared that the fees and outstanding amount is immediately due.

As of January 5, Kaisa has not received any demand for repayment from other creditors, the company added in the filing.

Kaisa's default comes soon after another Chinese developer Agile Properties faced funding problems after its chairman Chen Zhuo Lin was taken into custody in October last year. Chen was released from custody in December.

However, in contrast to Kaisa, Agile was able to revise a clause in its HK$2.6 billion loan facility signed in June, which stated that it would be a credit event or default if Chen ceased to be the chairman.

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