HONG KONG -- China Evergrande Group, the world's most indebted property developer, saw its credit rating cut for the second time in as many days on Wednesday as concerns mount that its liquidity crisis will lead to debt default.
Fitch Ratings cut its score for the developer to CC, just two notches above default. The move came just a day after Moody's Investors Service slashed its rating for the company by three notches to Ca, which implies it is "likely in or very near default." S&P on Aug. 5 dropped its rating by two levels to CCC, a slightly more favorable rating than the other two agencies.
"The downgrade reflects our view that a default of some kind appears probable," Fitch said. "We believe credit risk is high given tight liquidity, declining contracted sales, pressure to address delayed payments to suppliers and contractors, and limited progress on asset disposals."
Evergrande's Hong Kong-listed shares fell as much as 3% after the Fitch announcement to trade below the 2009 initial public offering price, though they closed morning trade up 0.8%. The company's shares have lost three-fourths of their value this year, while its bonds are trading below 30 cents on the dollar.
Evergrande itself, which has $305 billion in total liabilities, warned for the first time last week that it may fail to pay its debts unless it can attract new investors and sell assets. While it has not defaulted on bonds yet, in the last few months it has failed to pay suppliers and contractors on time, leading to the suspension of projects.
Founded 20 years ago by Xu Jiayin, Evergrande grew to become China's largest developer on the back of a borrowing binge. The company is now a bellwether for the country's leveraged property sector and is closely tracked by regulators, investors and rating agencies concerned about the potential for contagion should it default on loans from banks and trusts.
The People's Bank of China and the China Banking and Regulatory Commission summoned company executives last month, telling them to reduce debt and refrain from spreading "misleading information."
The Moody's announcement on Tuesday marked the third time the agency has cut its rating for the company since June. Moody's said the reduction reflected the "heightened liquidity and default risks" given the size of Evergrande's maturing debt over the next year and weak recovery prospects for creditors in the event of a default.
Evergrande has $7.7 billion worth of bonds maturing next year, according to Refinitiv, and faces $850 million in bond interest payments through the end of this year, according to Fitch.
Its debts due within one year stood at 240 billion yuan ($37.1 billion), compared with bank deposits of 161.6 billion yuan, according to its filing. The company also said its use of 74.86 billion yuan of the deposit was "restricted."
Last month after reporting a 29% fall in first half profits, the company said it plans to shore up its finances by selling additional shares in its Hong Kong-listed electric vehicle and property services units as well as other assets, rolling over loans, boosting property sales and clamping down on costs.
Between March and December 2020, Evergrande raised almost $11.5 billion by selling equity as well as stakes in various subsidiaries.
Last month, it sold 1 billion yuan of its holdings in regional lender Shengjing Bank to municipal agencies and agreed to sell a stake in internet company HengTen Networks for $418 million, less than two months after offloading a $570 million stake. It also revealed this month that it had held unsuccessful talks about selling a stake in China Evergrande New Energy Vehicle Group to smartphone maker Xiaomi.
Evergrande revealed contracted sales, a key source of its liquidity, plunged 26% in August, following a 13% fall in July. Fitch said the asset disposals carry "significant execution risk" and the negative news flow would weaken the confidence of investors, lenders and homebuyers.
"We still think Evergrande has the resilience to survive for a longer period," said Jackson Chan, an analyst at Bondsupermart. However, if the company has to resort to debt resolution by legal means, "it may take a long time to come up with a recovery plan for the relevant bonds."