We May Have Just Witnessed Our First Truly Crippling Chinese Real Estate Default

Chinese real estate developer, Kaisa Group Holdings had a healthy balance sheet according to investors and observers alike. It was rated the number one firm residential property sales in Shenzen, its province, in the first half of 2014. It was known for fast, reliable work.

But on Thursday, it appears Kaisa became the first Chinese development firm to default on offshore debt, missing a $US500 million interest payment on debt to foreign investors.¬†Representatives of the company say they aren’t sure whether or not the payment was made, The Wall Street Journal reports.

Consider this a slap in the face to investors chasing yield around the world and finding it (or so they think) in emerging market junk bonds. Back in 2013, Kaisa along with fellow Chinese developer Country Garden received $US28 billion of orders for a combined $US1.25 billion of high yield bonds. Kaisa promised that their bonds would yield a rate of 10.25%. Investors were thrilled.

And things seemed fine. In June the company said that it had over $US1.5 billion in cash. On January 1st the numbers was calculated at $US772 million — despite the fact that the stock had been halted in December and that in the month leading up to that, Kaisa’s stock fell over 48%.

¬†With that cash the company said it had, though, Kaisa’s $US128 million interest payment should have been doable.

But it wasn’t due to a number of factors. Not least of all the Chinese economic slowdown and the country’s sluggish housing market. Executives have quit since the company released an ominous statement last December saying problems with government permits would harm cash flow.

Those problems started back in October, when the federal government began investigating Shenzen officials for corruption in the housing market. Some said that Kaisa’s founder,¬†Kwok Ying Shing (who has since quit the company) was unreachable — not a terribly uncommon thing in China, but certainly a bad sign for the company. Kwok denied that he was missing.

As yet, however, it seems that this debt payment is. Expect this to seriously shake investors, and for this to impact an already cash/investment hungry, over-leveraged Chinese corporate sector.

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