Why Kaisa’s default isn’t the sign of more to come
Despite fears Kaisa's dollar bond default may herald of a wave of more to come from China, the property developer's troubles may be more of a one-off soap opera.
"This case has gone a little offbeat," said Steve Wang, chief China economist at Reorient Financial, calling it both "unique" and "unpredictable."
The developer defaulted on its offshore dollar-denominated bonds on Monday when the 30-day grace period expired without the company making coupon payments of around $52 million on two senior notes. It's the latest in the company's murky troubles, which may have begun last year when local authorities blocked it from selling some of its projects. The restrictions may have been related to a corruption investigation into Shenzhen's former security chief Jiang Zunyu, according to a Bloomberg News report.
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Earlier this year, larger rival Sunac China proposed buying 49.3 percent of Kaisa for around $587 million from the controlling Kwok brothers, but local Chinese media are reporting that senior Sunac managers were locked out of Kaisa offices this month. It's a development that might signal the company preferred a default to a rescue.
"Sunac has indicated it's not willing to wait indefinitely," said Christopher Yip, director for corporate ratings at Standard & Poor's, which downgraded Kaisa's rating to "D," indicating payment default, last month. The deal has been riding on whether Kaisa can resolve its situation with creditors, he noted.
"If Sunac walks away, that's going to be quite a negative for the long-term prospects for Kaisa itself," Yip said.
Under the spotlight
Kaisa's saga has been under the spotlight as many analysts consider China's property sector -- closely watched because it contributes an estimated 15 percent of the mainland's gross domestic product (GDP) -- overheated and ripe with default risks. While China's corporate defaults have been rare, Beijing is widely believed to be moving away from bailouts and toward allowing troubled companies to succumb to market forces.
But it isn't clear Kaisa's travails are emblematic for the sector.
"We haven't seen other companies facing the same kind of situation," said Yip, noting Chinese officials don't appear to have ever elaborated on why sales of Kaisa's projects were initially restricted, although those restrictions were partially removed earlier this month.
"We still expect more [property sector] defaults this year, but that's more due to the fundamentals of the sector weakening, rather than other companies facing a similar fate," Yip said.
Reorient's Wang also doesn't believe Kaisa's case is indicative of a potential sector blow up or even how other takeover attempts of troubled players might proceed.
"I wouldn't necessarily suggest this deal is a good example of what goes on across the PRC (People's Republic of China) housing sector in terms of M&A," Wang said. As far as the default goes, "this is basically what the government wants the market to do. It's just getting a little more soap opera than people had originally anticipated."
Others also don't expect Kaisa's troubles offer much of a harbinger of systemic issues.
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"This is something that's been on the radar screen for such a long time. It's incorporated into asset prices and people's outlook on the market," said Louis Kuijs, a China economist at RBS. "Given the financial strain in much of the industrial sector, I would expect quite a few other credit events happening, but this particular one I don't think will create a lot of shock waves in the system."
More defaults to come?
To be sure, some expect many more defaults in China's future.
"You've got to expect more in China simply because they are now opening up the economy to competition. They've clearly stated they want to have more of a market economy," Mark Mobius, executive chairman for emerging markets at Franklin Templeton, said.
He expects the mainland's "default experience" will become similar to rates in the U.S. and Europe. Mobius also isn't terribly surprised by Kaisa's apparent resistance to the takeover bid, noting this is common globally among family-controlled companies.
But Kaisa may not have much of a choice, Mobius said.
"If it ends up in courts, they have to dispose of assets," he said. "They may not dispose the entire company, but they may have to dispose of key elements."
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1