Sinic developer defaults amid Evergrande contagion

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Sinic Holdings has become the latest Chinese real estate company to default, as investors await word on China Evergrande Group’s ability to make interest payments on dollar bonds that are due this week.

S&P Global Ratings downgraded Sinic’s credit rating to “selective default” from “CC” after the firm failed to settle the interest and principal on a US$250 million (S$336 million) note due on Monday (Oct 18).

Sinic warned earlier this month that it did not intend to repay the US dollar bond, which may result in a cross-default on the company’s other two notes.

The announcement comes on the heels of developer Fantasia Holdings Group’s unexpected default earlier this month. China’s real estate industry has been shaken by the Evergrande crisis, as officials attempt to rein in debt and avert a bubble.

“We anticipate that this non-payment may result in cross defaults and increase demands for repayment of the company’s other obligations, including its US currency bonds and domestic loans, some of which are already past due,” S&P Global said in a statement.

Sinic is much smaller than Evergrande, placing 41st in a listing of China’s largest property developers by contractual sales in August, compared to its larger competitor, which ranks third. According to Bloomberg statistics, Sinic has outstanding dollar bonds totaling US$694 million. In September, the company defaulted on domestic payments.

Evergrande’s 30-day grace period for meeting interest payment obligations on multiple dollar notes is set to expire this week, increasing the prospect of the real estate behemoth defaulting.

The pressure on real estate firms adds to a growing list of wider concerns for China’s economy, which is roughly 30% dependent on the real estate sector. For the first time in six years, home prices dropped in September, while real estate investment fell for the first time since previous year.

A government crackdown on the property sector is making it more difficult for businesses to refinance and risks sparking a wave of defaults. This month, the yield on junk dollar notes issued by the country’s debtors reached a decade high of nearly 20% before falling to 17%.

Sinic and Evergrande’s shares are both banned from trading in Hong Kong. A benchmark index of Chinese real estate companies dropped 0.3% to trade at a three-year low.

According to a top IMF official, the dangers to China’s economy from an Evergrande collapse remain “limited” for the time being.

“The public understands that the government has the instruments necessary to manage risks moving ahead,” Helge Berger, the IMF’s China mission director, said on Bloomberg Television.

Risks in the property business are now confined within the sector, but authorities should maintain surveillance in case they increase, he said on Wednesday.

Beijing finally spoke out about Evergrande’s troubles last Friday and reaffirmed over the weekend that the danger can be controlled. Citigroup analysts, however, said in a note on Monday that “more decisive measures are required to bolster market confidence in the property industry.”

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