China Faces Massive Corporate Default

HONG KONG — For weeks, global markets have been watching the struggles of China Evergrande, a teetering real estate giant weighed down by $300 billion or more in obligations that just barely seemed able to make its required payments to global investors.

On Thursday, three days after a deadline passed leaving bondholders with nothing but silence from the company, a major credit ratings firm declared that Evergrande was in default. Instead of resolving questions about the fate of the Chinese behemoth, the announcement only deepened them.

The firm, Fitch Ratings, said in its statement that it had placed the Chinese property developer in its “restricted default” category. The designation means Evergrande had formally defaulted but had not yet entered into any kind of bankruptcy filing, liquidation or other process that would stop its operations.

It’s the nature of that next step — bankruptcy, a fire sale or business as usual — that remains unknown. In the United States and many other places, bondholders could push an unwilling company into some form of reorganization, usually in court, and divvy up the pieces.

That may still happen. But Evergrande is faltering in China, where the Communist Party keeps a firm hand on corporate meltdowns to keep them from spreading out of control. With Evergrande, the risk is high: A sudden unwinding of the company could hit the country’s financial system or, potentially, the many homeowners in China who have already paid for Evergrande apartments that are yet to be built.

The company’s largely resigned investors are now waiting to see what Evergrande, under the advice of a group of financial types tied to the state, will do next.

“We all expected that Evergrande was not going to be able to pull a rabbit out of their hat,” said Michel Löwy, chief executive of SC Lowy, an investment firm that has a small position in Evergrande bonds.

“Now, the ball is in their court to come up with some form of restructuring proposal,” he said.

Evergrande did not respond to a request for comment. Fitch said the company had not responded to its own request for confirmation about whether it had met or missed an $82 million payment to bondholders due on Monday, which prompted the ratings firm’s Thursday move.

Fitch on Thursday also put Kaisa, another large and distressed developer, into its “restricted default” category after the company failed to pay bondholders $400 million earlier this week.

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