China’s Property Sector Teeters

THE DOMINOES in China’s property market are teetering, even if the first has yet to fall.

Fantasia Holdings, a mid-sized developer based in Shenzhen that the rating agency S&P downgraded to triple C last week, suspended trading in its shares on the Hong Kong exchange on Tuesday after announcing that it had defaulted on a $206 million bond the day before.

It has a further $1.9 billion of offshore bond payments a d $992 million of onshore bond payments due by year’s end. Last month, the company had told investors that it did not have a liquidity issue.

Stress is clearing rising in China’s property sector and the high-yield bonds that underpin it. Fantasia joins beleaguered Evergrande in suspending its shares. In addition, rating agency Fitch has cut its grading of another developer, Shanghai-based Sinic Holdings, to C from triple C. There is only one further cut left, to D for default.

Evergrande, which is selling assets where it can to prevent being dragged under by total liabilities of more than $300 billion, is expected to announce that it has sold 51% of its property service business, which is listed in Hong Kong, to Hopson Development for $5 billion. Evergrande missed an interest payment on an offshore bond on September 23, triggering a 30-day grace period before a formal default.

Evergrande has said nothing formally beyond an exchange filing that it was suspending trading in advance of a ‘possible general offer’ for its Hong Kong-listed shares. Any such offer could be imminent or could not come for some time, with Evergrande’s shares, which had fallen 80% this year, remaining suspended in the interim.

Beijing has also been officially silent on the sector’s problems, even if authorities are orchestrating as soft a landing as they can behind the scenes. Spoiler alert: it will still be pretty bumpy, especially for bondholders.