Evergrande bond holders in limbo after missed payment

SHANGHAI/SINGAPORE • Global investors have been left on edge after a missed bond interest payment by China's property giant China Evergrande Group, worried that a potential default could spill over into the broader economy.

A deadline for paying US$83.5 million (S$113 million) in interest passed on Thursday without remark from Evergrande, while three bond holders said they had not received payment as at 8am yesterday (Hong Kong time).

The company owes US$305 billion and has run short of cash, and investors are worried that a collapse could pose systemic risks to China's financial system and reverberate around the world.

Evergrande's shares slid 11.6 per cent yesterday, reversing a 17 per cent rally on Thursday, while its unit, China Evergrande New Energy Vehicle Group, plunged 25 per cent.

Evergrande's 8.25 per cent dollar bond due next year was down 2.4 cents on the dollar at 29.6 cents, according to Bloomberg-compiled prices. It jumped the most in 18 months the day before.

"These are periods of eerie silence as no one wants to take massive risks at this stage," said Mr Howe Chung Wan, head of Asian fixed income at Principal Global Investors in Singapore.

"There's no precedent to this at the size of Evergrande... We have to see in the next 10 days or so, before China goes into holidays, how this is going to play out."

China's central bank again injected cash into the banking system yesterday, seen as a signal of support for markets. But the authorities have been silent on Evergrande's predicament and China's state media has offered no clues on a rescue package.

European Central Bank president Christine Lagarde said direct exposure to Evergrande in Europe, and the euro zone in particular, is "limited".

In an interview with CNBC, Ms Lagarde said: "We are monitoring and I had a briefing earlier on today because I think that all financial markets are interconnected. For the moment, what we are seeing is China-centric impact and exposure."

Her comments chime with those of United States Federal Reserve chair Jerome Powell. He said on Wednesday that there is little direct US exposure to the company's debt, but the situation could impact global financial conditions.

Evergrande's unusual silence about its missed interest payment has put a focus on what might happen during a 30-day grace period before a default is called. Some Chinese companies have used such grace periods in the past to make payments.

Financial regulators in Beijing had issued a broad set of instructions to Evergrande on Thursday, encouraging the developer to take all measures possible to avoid a near-term default on dollar bonds while focusing on completing unfinished properties and repaying individual investors.

But there is no indication that they offered financial support for the bond payment, and it is unclear whether officials believe the company should eventually impose losses on offshore creditors.

European bankers, meanwhile, have spent the past few days reassuring investors, clients and regulators about any fallout from Evergrande.

Credit Suisse Group, which underwrote the most Evergrande bonds among international banks in the last 10 years, issued statements showing that its asset management unit's funds did not hold much of the developer's debt. It also reached out to shareholders about the bank's own minimal level of exposure, according to a person briefed on the discussions.

UBS Group's risk is "immaterial" and limited to the execution of collateral calls on margin loans, said chief executive Ralph Hamers on Thursday.

That came a day after HSBC Holdings' group chief executive Noel Quinn told a conference that he is not worried about the bank's direct links to Chinese real estate.

In China, fears of contagion from any Evergrande default saw some Chinese banks, insurers, and shadow banks halting new credit to property developers, as they ran urgent checks on their exposure to the troubled sector.

To calm the market and in an unusual move, Chinese lenders including China Minsheng Bank, China Zheshang Bank and China Everbright Bank have been offering public reassurance and voluntarily disclosing their exposure to Evergrande and the property sector.

But internally, financiers are scrambling to reduce their exposure to "non-quality property assets", bracing themselves for a sharp deterioration in the financial health of some developers.

BLOOMBERG, REUTERS