HONG KONG (BLOOMBERG) - China Evergrande Group bondholders are about to find out if the property giant's liquidity crisis is as dire as it appears.
Interest payments on two Evergrande notes come due on Thursday (Sept 23), a key test of whether the developer will continue meeting obligations to bondholders even as it falls behind on payments to banks, suppliers and holders of onshore investment products.
Investors are pricing in a high likelihood of default, with one of the notes trading at less than 30 per cent of face value.
Concern over Evergrande's ability to make good on US$300 billion (S$405 billion) of liabilities is spilling into China's financial markets.
Shares of other real estate firms have plunged, while the yield on an index of dollar-denominated junk bonds has climbed to about 14 per cent, the highest in nearly a decade.
The People's Bank of China injected US$14 billion of short-term cash into the financial system last Friday in a sign policymakers want to soothe nerves.
The Evergrande payments due on Thursday include US$83.5 million of interest on an 8.25 per cent, five-year United States dollar bond, Bloomberg-compiled data shows.
There is a 30-day period before a missed payment is considered a default, according to the bond's covenants.
Evergrande needs to pay a 232 million yuan (S$48.4 million) coupon on an onshore bond the same day.
In total, Evergrande has US$669 million in coupon payments coming due to the end of this year. Some US$615 million of that is on dollar bonds, Bloomberg-compiled data shows.
Fitch Ratings flagged the increased chance of a payment failure this month when it slashed the firm's credit grade even deeper into junk territory, citing the risk of "probable" default.
Evergrande is also scheduled to pay interest on bank loans on Monday, with a one-day grace period.
Monday and Tuesday are public holidays in China.
While details on the amount due are not publicly available, Chinese authorities have already told major lenders not to expect repayment, people familiar with matter said last week.
Evergrande and banks are discussing the possibility of extensions and rolling over some loans, the sources said.
Bond investors are rushing to lock in professional help as a potential restructuring for Evergrande edges closer to reality.
Law firm Addleshaw Goddard has engaged with some of the company's bondholders and is preparing to establish a creditor committee to negotiate with Evergrande, according to a person familiar with the matter.
Evergrande's debt pile includes about 571.8 billion yuan of borrowings from banks and other financial institutions such as trusts, with 240 billion yuan due in less than one year.
The average borrowing cost stood at 9.02 per cent as at June 30. A portion of Evergrande's borrowings was secured by a pledge of its properties and equipment, land use rights, cash held at banks and the equity interests of certain subsidiaries.
China Minsheng Banking Corp, Agricultural Bank of China and Industrial and Commercial Bank of China were among the developer's principal banks at the end of last year.
Whether the sell-off in Evergrande bonds drags down the broader credit market may depend on the company's ability to buy time with banks.
A messy default on loans could stoke fears of widespread contagion, something Chinese President Xi Jinping's government has been keen to avoid even as it tightens financing restrictions on overstretched developers and discourages government bailouts.