Evergrande bondholders in limbo over debt resolution; its shares and bonds slide

Evergrande was due to pay US$83.5 million in interest on a US$2 billion offshore bond on Sept 23.
Evergrande was due to pay US$83.5 million in interest on a US$2 billion offshore bond on Sept 23.PHOTO: EPA-EFE

SHANGHAI/SINGAPORE (BLOOMBERG, REUTERS) - Global investors have been left on edge after a missed bond interest payment by China’s property giant Evergrande,  worried that a potential default could spill over into the broader economy.

A deadline for paying US$83.5 million (S$112.6 milion) in interest payment passed on Thursday without remark from Evergrande, while three bondholders said they hadn’t received payment as of 8am on Friday Hong Kong time.

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

Evergrande’s shares slid 11.6 per cent on Friday, reversing a 17 per cent rally the previous day, while its unit, China Evergrande New Energy Vehicle Group, plunged 25 per cent.

Evergrande’s 8.25 per cent dollar bond due 2022 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 Howe Chung Wan, head of Asia 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 ten days or so, before China goes into holiday, how this is going to play out.”

China’s central bank again injected cash into the banking system on Friday, seen as a signal of support for markets. But 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.”

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

Her comments chime with those of Federal Reserve chair Jerome Powell. He said on Wednesday there is little direct US exposure to the company’s debt, but that 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’s no indication that they offered financial support for the bond payment, and it’s 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 its asset management unit’s funds didn’t 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, chief executive officer Ralph Hamers said on Thursday. That came a day after HSBC Holdings’ Noel Quinn told a conference that he’s 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 publicly reassuring 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 for a sharp deterioration in the financial health of some developers.BLOOMBERG, REUTERS

The WSJ earlier said local governments had been ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande's operations in their respective regions.

They have also been ordered to talk to local state-owned and private property developers to prepare to take over projects and set up law-enforcement teams to monitor public anger and "mass incidents", a euphemism for protests, it said.

Analysts said the moves by Beijing underscored the pressure on Evergrande, whose liabilities run to 2 per cent of China's gross domestic product, to contain the fallout from its credit crunch and protect mom-and-pop investors over professional creditors.

'All my savings'

Oscar and Partners Capital founder and chief investment officer Oscar Choi said Evergrande was wary of inflaming social tensions by leaving homes unbuilt, construction workers unpaid and retail investors counting their losses.

Once those priorities had been met, Evergrande would talk to its other creditors, he said, adding: "Otherwise a few hundred thousand people will fight with the government."

At an eerily quiet construction site in eastern China, worker Li Hongjun said Evergrande's crisis meant he will soon run out of food while Ms Christina Xie, who works in the southern city of Shenzhen, feared Evergrande had swallowed her savings.

"It's all my savings. I was planning to use it for me and my partner's old age," said Ms Xie. "Evergrande is one of China's biggest real estate companies... my consultant told me the product was guaranteed."

Evergrande’s EV unit stopped paying staff, factory suppliers

China Evergrande’s electric-car unit missed salary payments to some of its employees and has fallen behind on paying a number of suppliers for factory equipment, according to people familiar with the matter, evidence the stricken property developer’s debt woes are having an impact beyond its core business.

The cash flow difficulties mean China Evergrande New Energy Vehicle Group will likely miss its target to start mass deliveries next year considering trial production of electric vehicles at its factories in Shanghai and Guangzhou has been dialed back, the people said, asking not to be identified as they’re not authorized to speak publicly.

Several equipment suppliers, meanwhile, began withdrawing their on-site personnel from the Shanghai and Guangzhou sites as early as July after payments for machinery in Evergrande NEV’s factories weren’t made.