Trading restrictions were placed on nine onshore bonds sold by China Evergrande Group's flagship property unit, after a local credit rating agency slashed the debts' creditworthiness, deepening the woes for the world's most indebted real estate developer.
Three yuan-denominated bonds valued at 28.2 billion yuan (US$4.4 billion) issued by Evergrande's Hengda Real Estate Group unit were restricted to negotiated transactions on the Shanghai Stock Exchange, according to a statement. On the stock exchange of Shenzhen in Evergrande's hometown, six bonds valued at 25.3 billion yuan were relegated to the high-volume block transactions.
The restrictions, imposed after trading of Evergrande's debt was suspended for a day in both markets, were triggered by China Chengxin International, which downgraded the developer's bonds to "A", from "AA". The ratings downgrade automatically disqualified the bonds from bid-based transactions on the integrated electronic platform in both markets.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
"Negotiated transactions and block trading set a higher barrier [for traders], usually seen as a way to protect the average [minority] investor," said Zhou Chuanyi, a credit analyst at Lucror Analytics in Singapore. "Offshore investors would take this as a signal to be extremely cautious."
HNA Group, China's largest global asset buyer spawned from the country's largest privately owned airline, made similar moves in February, limiting all of its yuan bonds to negotiation and high-volume trading after it entered bankruptcy restructuring.
The trading restrictions are the latest woe to befall Evergrande as it struggles for capital to extricate itself from its US$300 billion of total liabilities. Evergrande's businesses stretch from its core real estate projects to the production of electric cars, wealth management and even a football team in China's Super League.
The company's most active yuan-denominated bonds due in July 2022 have declined to distressed levels, valued at 0.27 yuan on the yuan, from 0.83 yuan three months ago when Evergrande's latest debt woes began anew.
The panic on Evergrande's debt was triggered on July 19, when the Yixing branch in Jiangsu province of China Guangfa Bank froze 132 million yuan of the developer's onshore deposits to recover a loan. The developer eventually repaid its borrowing and averted the crisis, only to stumble into another. Evergrande faces a key liquidity test next week when it is due to pay US$83.5 million in interest payments on September 23 for a dollar-denominated note, in addition to 232 million yuan for a renminbi note, according to data compiled by Bloomberg.
The company's fortunes had not been helped by Chengxin, which put Evergrande and its bonds on a watch list for further downgrades, after slashing their ratings. S&P piled in, downgrading Evergrande's creditworthiness to the junk status of "CC", implying that the company's bonds are of "very high risk", non-investment grade.
"The liquidity and funding access of China Evergrande Group are shrinking severely, as shown by an announced material drop in sales, a fall in the cash balance, and the continued use of physical properties to settle payments," S&P said. "The company may not be able to service debt in time, which will lead to a default scenario including the possibility of debt restructuring."