A version of this article first appeared on Finance asia.
China offshore bondholders Evergrande Group would not have received coupons Monday, December 6 at the latest, end of a 30-day grace period. If the group fails to make the $ 82.5 million in interest payments, the developer would experience its first overseas default on a government bond.
Evergrande is currently known to be the most indebted real estate developer in the world, with approximately US $ 300 billion in debt, including US $ 20 billion in offshore bonds.
“We expect Chinese developer defaults to increase over the next six to 12 months,” S&P Global Ratings said. report November 18. The report noted the company’s recent demotion of seven Chinese developers to or below “CCC” level, adding, “We believe there is a default scenario for them.”
The report detailed the outlook for investors on Chinese real estate developers as “exceptionally negative”. In a survey conducted by the rating agency, 91% of those polled expected more defaults from Chinese developers in the next six to 12 months.
Of these, 48% detailed an increase in Chinese developers’ default expectations in 2022, 28% noted the likelihood of a “small number” of defaults, and 15% felt that “we are far from the end of the line. tunnel ”.
December 3, Evergrande confessed that he may not have enough funds to meet his financial obligations. The Hong Kong-listed company noted receipt of a request to fulfill its obligation as guarantor of a debt of $ 260 million. The company warned that its own failure to do so could “cause creditors to demand faster payment.”
In a vicious circle, if the creditors ask for an accelerated repayment which Evergrande cannot answer, they will be able to initiate bankruptcy proceedings against the company.
DMSA Deutsche Markt Screening Agentur, a German provider of business information, has announced its intention in the coming days to file bankruptcy proceedings against Evergrande in the Grand Court of the Cayman Islands, where the developer is domiciled.
In an article on his LinkedIn profile on December 3, Marco Metzler, senior analyst and senior cabinet adviser, said: “We are justified by this official statement (from Evergrande). We still have not received the interest on our bonds (by Evergrande).
However, it may be that the ruling Chinese authorities rather than a Cayman Islands court ultimately decide the fate of Evergrande, headquartered in Shenzhen, which holds most of its assets in China. The same evening, the Guangdong provincial government called the chairman of the company, Hui Ka Yan (Xu Jiayin), for immediate talks.
Guangdong government announcement portrayed Hui as desperate for his help, saying,
“At the request of Evergrande, in order to mitigate risks, protect the interests of all parties and maintain social stability, the Guangdong provincial government sent a task force to Evergrande to oversee mitigation, strengthen internal controls and maintain normal business operations. “
The People’s Bank of China (PBOC) Express his support for the Guangdong agency in its attempt to supervise the activities of the company.
Metzler followed the development of assignment a photo of Yan accompanied by the caption: “Bankruptcy knocks on the door …”
China’s central bank, the PBOC, has hinted that it will likely leave Evergrande’s offshore bondholders to market forces. The PBOC noted, “The risks that arose at Evergrande were mainly due to its poor operations and indiscriminate expansion. The offshore US dollar bond market is heavily market driven with fairly strong judgment, and has clear rules and procedures to deal with these matters. “
The central bank added that it would maintain communication with regulators based in other jurisdictions to resolve bond issues. The PBOC will make it easier for Chinese companies to pay interest or buy back their bonds, It said.
A Fitch Notes report September 28 estimated that Evergrande’s overseas senior unsecured note holders could get back from zero to ten percent of their principal and interest.
Are the risks of Evergrande manageable?
The buyout of Evergrande by the Guangdong government responds to Andrew Collier’s prediction in a report by Global Source Partners, a US macroeconomic research firm, on October 6.
In it, Collier, managing director of Orient Capital Research, said, “Beijing plans to force local governments to resolve debt issues locally. This transfers responsibility from the center to the periphery. The Politburo’s attitude is that the provinces have benefited from the success of companies like Evergrande, so it’s up to them to figure it out. This relieves the financial responsibility of the center.
He added that the geographic diversity of Evergrande’s debt solutions is likely to avert a system-wide catastrophe. “If Beijing can distribute the damage to various regions, then the prospect of contagion is minimized. Why is this important? Xi Jinping and the main concerns of the Politburo are social stability and Party primacy. A financial crisis would undermine the legitimacy of the Party. It would not cause minor economic hardship in a number of provinces. “
Chinese financial regulators have so far downplayed Evergrande’s contagion risks, saying they are manageable.
The PBOC reiterated this sentiment, saying, “The short-term risks of individual real estate companies will not affect the financial capacities of the markets in the medium and long term. Recently, domestic real estate sales, land purchases and financing are gradually returning to normal, (and) some Chinese real estate companies are starting to buy back their offshore bonds. “
Friday, December 3, China Banking and Insurance Regulatory Commission (CBIRC) responded to a journalist’s question about Evergrande’s inability to fulfill his obligations abroad, saying it was an individual case. With one third of Evergrande’s debt tied to the financial sector and these holdings being diversified, the CBIRC said, “this will have no negative effect on the normal operations of our country’s banking and insurance sectors.”
Likewise, a note from the China Securities Regulatory Commission (CSRC) declared, “Currently, the real estate sector in our country maintains healthy development and most real estate companies stick to their core business with stable operations … The bond market default rates on the (Chinese) stock exchanges are kept at the low level of 1%. “Evergrande’s contagion effect can be controlled,” the securities watchdog added.
But others do not share the optimism of Chinese regulators. The U.S. Federal Reserve Financial Stability Report published on Nov. 8, warned that financial strains in China’s real estate sector could have possible spillover effects on the United States and the rest of the world.
Other Chinese real estate developers listed on the Hong Kong Stock Exchange have also admitted to being in debt.
On December 6, Sunshine 100 China Holdings announcement default on $ 170 million in offshore bonds listed on the Singapore Stock Exchange (SXE), which were due on December 5. In another announcement the same day, Sunshine 100 said the default would trigger more debt defaults, including $ 219.6 million of senior greenbacks due 2022 that are listed on the Hong Kong Stock Exchange (HKEX) and $ 120 million dollars of senior notes due 2023, which are listed in Singapore.
December 3, Kaisa Group warned it may not be able to meet its repayment obligations on its $ 400 million 6.5% senior notes.
On December 2, China Aoyuan Group noted it did not honor its obligations of $ 651.2 million in principal debt to various creditors.