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Evergrande domestic debt deal calms immediate contagion concern

admin | September 22, 2021
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China Evergrande agreed to settle interest payments on a domestic bond on Wednesday, while the Chinese central bank injected cash into the banking system, soothing fears of imminent contagion from the debt-laden property developer.

Evergrande, Asia’s biggest junk bond issuer, is so entangled with China’s broader economy that its fate has kept global stock and bond markets on tenterhooks as late debt payments could trigger so-called cross-defaults.

Many financial institutions have exposure to Evergrande through direct loans and indirect holdings, while any defaults will also trigger sell-offs in the high-yield credit market.

Banking system In an effort to reassure investors, the People’s Bank of China’s injected 90 billion yuan (€11.9 billion) to the banking system, signalling support for markets as they braced for what is expected to be one of China’s largest-ever debt restructurings.

Evergrande is scrambling to avoid defaulting on a number of bonds with payments due this week and it and its main unit, Hengda Real Estate Group, said on Wednesday it had “resolved” one coupon payment due on Thursday on its Shenzhen-traded 5.8% September 2025 bond, via “private negotiations”.

It did not specify how much interest would be paid or when, nor did Hengda mention Evergrande’s other pressing debts, leaving it unclear what this means for $83.5 billion in dollar bond interest payments due on Thursday.

Evergrande did not immediately respond to questions about its deal or its intentions.

Bondholders But engagement with bondholders, a common way to avoid default, on top of chairman Hui Ka Yuan’s vow this week that Evergrande would “walk out of its darkest moment,” cheered investors and soothed markets more broadly.

“These events seem to suggest that the company is taking control of the situation and is trying its best to work out a solution with creditors,” Singapore-based Dexter Tan, a senior fixed income analyst at Bondsupermart.com, said.

Evergrande, which epitomised the borrow-to-build business model and was once China’s top-selling developer, also has a $47.5 million (€40.5 million) bond interest payment due next week.

“We do not have a clearer picture as how Evergrande settled its onshore coupon,” Singapore-based Chuanyo Zhou, a credit analyst at Lucror Analytics, said.

“It doesn’t look like a cash payment. It may still miss the coupon on offshore bonds due tomorrow.”

Evergrande’s Hong Kong shares did not trade due to a public holiday but rose 40% in Frankfurt to €0.38.

Lehman talk Analysts have been downplaying the risk that a collapse threatens a “Lehman moment”, or liquidity crunch, which freezes the financial system and spreads globally.

Only some $20 billion of $305 billion outstanding debts is owed offshore, according to Refinitiv data.

But the risk of failure remains high, particularly if offshore bondholders are less willing than those in China to cut deals, and the fallout has already begun to trigger tremors in the property market of the world’s second-largest economy.

“Developers there have long claimed that the success of their business is driven by the three carriages: high turnover, high gross profit, and high leverage,” said Michael Pettis, a nonresident senior fellow at the Carnegie–Tsinghua Center for Global Policy, in a blog post.

“But all of these proverbial carriages are breaking down as the effects of Evergrande’s crisis spread.”

There is also mounting political pressure to act as the anger of retail investors with their savings sunk in Evergrande properties or wealth management products swells.

Asked at a regular daily briefing on Wednesday whether China would take measures to intervene, foreign ministry spokesman Zhao Lijian only referred to the “responsible departments”.

Despite the risks, some funds have been increasing their positions in recent months. BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt, Morningstar data and a blog post showed.

Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager. – Reuters

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