Evergrande’s domestic debt deal eases immediate contagion fears

SINGAPORE / SHANGHAI, Sept. 22 (Reuters) – China Evergrande on Wednesday agreed to settle interest on a domestic bond, as China’s central bank injected liquidity into the banking system, temporarily assuaging fears of impending currency contagion. share of the indebted property developer.

Evergrande (3333.HK), Asia’s largest junk bond issuer, is so tied to the wider Chinese economy that its plight has kept the global stock and bond markets in suspense as late payments of debt could trigger cross defaults.

Many financial institutions are exposed to Evergrande through direct loans and indirect holdings, while any default will also trigger massive sales in the high yield credit market.

In an effort to reassure investors, the People’s Bank of China injected 90 billion yuan into the banking system, signaling support for markets as they prepare for what is expected to be one of the biggest debt restructurings. from China.

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

He did not specify how much interest would be paid or when, and Hengda did not mention Evergrande’s other urgent debts, not leaving clear what that means for $ 83.5 million in interest payments. bonds due Thursday.

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

But engagement with bondholders, a common way to avoid default, in addition to President Hui Ka Yuan’s vow this week that Evergrande would “emerge from its darkest moment,” urged investors and appeased. markets more broadly.

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

Evergrande, which embodied the borrow-to-build business model and was once the best-selling developer in China, also has a bond interest payment of $ 47.5 million due next week.

“We don’t have a clearer picture of how Evergrande settled its onshore coupon,” said Chuanyo Zhou, credit analyst at Singapore-based Lucror Analytics.

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

Evergrande’s woes have seen its shares drop 85% this year. The concerns have spread throughout the Chinese real estate market.

R&F Properties (2777.HK) and Sunac China (1918.HK) shares have both fallen around 50% year-to-date, Shimao (0813.HK) is down more than 40% and Country Garden (2007.HK) and Greenland Holdings (0337.HK) lost 30% and 20% respectively.

Evergrande shares in Hong Kong did not trade due to a public holiday, but rose 40% in Frankfurt to 0.38 euro ($ 0.45).

Its dollar bonds maturing next year and into 2024 have remained below 30 cents on the dollar.

In the broader market, the US dollar slipped as the S&P 500 rebounded from its recent losses.

BREAKDOWN

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

According to Refinitiv data, only $ 20 billion of the 305 billion outstanding debt is owed abroad.

But the risk of failure remains high, especially if offshore bondholders are less willing than those in China to make deals, and the fallout has already started to kick in the real estate market of the world’s second-largest economy.

“Comparisons are now being made between Evergrande with the collapse (of) Lehman Brothers and the crash in the US real estate market, with many analysts rejecting this comparison,” wrote Sebastien Galy of Nordea Asset Management in a recent memo. “The reality is that it will take weeks to understand the impact on growth given the impact on the real estate market.”

There is also growing political pressure to act as the anger of retail investors with their savings swallowed up in Evergrande properties or wealth management products increases. Read more

Asked Wednesday during a regular daily briefing on whether China would take steps to intervene, Foreign Ministry spokesman Zhao Lijian only referred to “responsible departments.”

Some funds have increased their positions in recent months. BlackRock and investment banks HSBC and UBS were among the biggest buyers of Evergrande debt, according to Morningstar data and a blog post. Read more

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

Still, many market players believe the fallout from Evergrande will likely be contained.

“Despite the concern, so far it looks like a corporate bankruptcy and not something worse,” said Brad McMillan, chief investment officer of Commonwealth Financial Network in a recent memo. “It’s a big problem, of course, but one that can be managed within the system.”

Reporting by Anshuman Daga in Singapore, Andrew Galbraith and Samuel Shen in Shanghai. Additional reporting by Hideyuki Sano in Tokyo, Clare Jim in Hong Kong and Gabriel Crossley in Beijing and Ira Iosebashvili in New York. Written by Anne Marie Roantree and Tom Westbrook. Editing by Richard Pullin, Jacqueline Wong and Alexander Smith

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