Fitch downgrades credit rating of China’s Evergrande amid wider worries

Fitch Ratings has downgraded the credit rating of China’s Evergrande Group, citing concerns about its track record and heavy debt load after a profit warning.

Evergrande Group has set up subsidiaries and bought property and hospital assets overseas since being bailed out by its government owners in 2012, Bloomberg reported at the time.

Standard & Poor’s in August slashed its rating for the China-based insurer after Evergrande, with a market value of more than $63bn, announced a surprise loss for the first half of the year.

Evergrande has been building up unprofitable businesses such as alternative investments and real estate development outside of Beijing since 2011 and has not fully repaid senior debts in time. It owns property in London’s Canary Wharf.

In 2014, Evergrande got $2.6bn of aid from local government investors, who believed they had to buy it and prop up the economy. Evergrande issued some bonds and resold others to repay its debts. Its debt was halved in 2012 to 600bn yuan (then about $96bn). Evergrande has loaned 200bn yuan of that back to the government at higher interest rates.

Fitch said it had downgraded the debt ratings for Evergrande insurance, which is partially owned by Evergrande’s holding company, and an insurance subsidiary linked to the group’s theme park and developments outside of Beijing. The downgrades reflect the risk of a possible senior debt default if Evergrande Group as a whole has to tap its holding company’s bank and bond facilities to repay unsecured debt, Fitch said.

Evergrande’s operating performance has been improving, with net profit for the six months ended 30 June up 62.5% from a year earlier, due to higher property prices and revenue from hotels. That came on the back of a net loss of 3.7bn yuan a year earlier. It is in the process of listing in Hong Kong.

However, its 2016 annual report showed that 3.7bn yuan of its loans to the holding company, which has no operations of its own, were to pay off unsecured debts that it had repackaged into bonds. This means Evergrande Insurance has a bigger exposure to unsecured debt than the holding company as a whole.

It would be the first time that an insurance company has defaulted on its debt as a whole, said Douglas Ren, director of South-east Asia financial services at Fitch. Fitch did not anticipate that Evergrande would need to restructure its debt holdings, Ren said.

Fitch said on Monday that any rights issue or capital raising by Evergrande would be seen as an extension of its general debt restructuring, which involves building more low-margin non-life insurance businesses and specialising in areas like healthcare.

“The uncertainty we have has not been alleviated by the group’s continued expansion, which we believe reflects some sort of strategic rationale,” Ren said.

Evergrande said on Sunday it would pay $65m to Imperial Capital Holdings Ltd to settle outstanding loans from 2013, according to a stock exchange filing. Imperial was the banker to Evergrande in the formation of its investment vehicle Yinda in 2011.

Evergrande had not posted a net profit in two years in the period between 2011 and 2013.

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