Moody's Investors Service has downgraded Kaisa Group Holdings's corporate family and senior unsecured debt ratings to Caa3 from B3. The ratings outlook is negative.

 

The rating actions follow Kaisa's announcement on January 1 2015 that the company failed to repay its loan due on  December 31 2014 from HSBC totaling HK$400 million.

 

"The rating downgrades reflect Kaisa's heightened default risk following the default on its HSBC loan, which in turn will likely trigger a cross-default on its offshore bonds," says Franco Leung, a Moody's vice-president and senior analyst.

 

On  January 1 2015, Kaisa's outstanding offshore bonds totaled about US$2.5 billion, including renminbi convertible bonds. The company will unlikely be able to repay the bonds using its internal resources if the bond repayments are accelerated.

 

"The incident will weaken Kaisa's access to funding and its sales performance," adds Leung.

 

Moody's believes that Kaisa's default on its loan from HSBC will significantly weaken its ability to access bank financing and the capital markets. The default will also undermine the confidence of property buyers in Kaisa; particularly in relation to the company's property offerings in Shenzhen, its home market. Such a weakening in buyer confidence will in turn weaken Kaisa's property sales performance.

 

Kaisa' ratings could be further downgraded if the company defaults on its other debt obligations.

 

The negative ratings outlook reflects uncertainty over Kaisa's liquidity position and the high likelihood that it will default on the bond repayments if the bond repayments are accelerated. Such a default will result in losses for bondholders.