Kaisa woes could worsen financing for junk-rated property borrowers

Chinese property developers rated below investment grade could face financing difficulties if Kaisa Group were to default on its debt obligation, Standard & Poor's Ratings Services (S&P) said on Thursday.

Kaisa, downgraded to selective default, missed a deadline to make a $26 million interest payment on its bonds due to mature in 2020. It has until February 9 to pay that coupon or else become the first Chinese real estate firm to default on its offshore debt.

S&P said it would downgrade Kaisa's rating to D, or default, "if we believe that the overdue interest payment will not be made within a 30-day grace period."

In the event of a default on its offshore bonds, the recovery rate could be low for Kaisa bond holders in line with the level of below 20 percent seen in other default cases, the credit-rating firm said.

"Developers with already weak liquidity and high refinancing needs in the next 12 months may face a funding crisis as financing sources could be steered toward more stable players," said S&P's Christopher Yip.

Kaisa's debt woes at one point shaved not only two-thirds off the value of its bonds but also affected sentiment in the rest of the sector with bonds rated below investment grade hit the hardest.

Debt issuance by junk-rated issuers has come to a virtual stop since Kaisa's troubles began last month, when authorities blocked sales at some of its projects in Shenzhen, South China's Guangdong Province.

"Overall, speculative-grade issuers will face tighter financing conditions as investors and financiers become more cautious," said Yip.