Evergrande's local bonds face more pressure after downgrade

Hong Kong

CHINA Evergrande Group's local bond investors are going to find it even harder to sell their holdings, as a credit rating downgrade prompts a change in trading platforms that further limits the pool of investors.

Unit Hengda Real Estate Group said its onshore bonds were suspended on Thursday after domestic risk assessor China Chengxin International Credit Rating Co lowered the firm and nine notes to A from AA.

The ratings remain on watch for further downgrade, according to filings to the Shenzhen Stock Exchange. Trading in the notes will resume on Friday, said Hengda, also known as Evergrande Real Estate Group.

Trading suspensions are relatively common in China's domestic debt market following credit rating downgrades because a score below AA requires bonds to be traded via bid-ask and block platforms, rather than auctions. That prevents smaller investors, some of whom already can't buy Evergrande's local notes, from making speculative investments.

Prices on the yuan bonds are expected to remain under pressure when trading resumes as the platform changes will limit liquidity even further. Traders will be watching Hengda's 6.98 per cent note due 2023 in particular, as it faces a potential early redemption in January.

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Still, the one-day pause in the onshore bonds hasn't deterred some traders from buying Evergrande's dollar notes on Thursday, betting that a recovery rate will be higher than prices currently reflect. The firm's dollar bond due 2025 climbed 1.6 cents on the dollar to 28.6 cents, Bloomberg-compiled prices show.

Chinese authorities have begun laying the groundwork for a possible debt restructuring, assembling accounting and legal experts to examine Evergrande's finances, while telling major lenders not to expect interest payments due next week on bank loans, Bloomberg reported previously. Evergrande has also hired financial advisers.

The firm is scheduled to make interest payments due Sept 23 of US$83.5 million for a dollar note and 232 million yuan ($36 million) for a local note, Bloomberg-compiled data show.

Evergrande shares fell as much as 10 per cent on Thursday to their lowest since October 2011 amid sharp declines in China's property sector. BLOOMBERG