Evergrande unit's onshore bond trading suspended

HONG KONG • China Evergrande Group's main unit, Hengda Real Estate Group, applied yesterday to suspend trading of its onshore corporate bonds following a downgrade, as the country's No. 2 property developer wrestles with a liquidity crisis.

The application follows repeated trading freezes of the bonds in recent days by the Shanghai and Shenzhen stock exchanges due to volatile trade.

With total liabilities of around $410 billion, Evergrande is scrambling to raise funds as it teeters between a messy meltdown with far-reaching impacts, a managed collapse or a government bailout.

Suspension of trade in Hengda's onshore corporate bonds indicates an increasing likelihood of defaults and restructuring, market participants said.

Hengda received notice on Wednesday from rating agency China Chengxin International that the bonds' ratings had been downgraded to A from AA, and that both the bonds' ratings and its issuer rating were put on a watch list for further downgrades, it said in a stock exchange filing.

Hengda applied to suspend trade of its onshore corporate bonds for one day, it said. On the resumption of trade today, its Shanghai and Shenzhen exchange-traded bonds will be traded only through negotiated transactions.

A bond trader, who declined to be identified, said the changes in the trading mechanism were likely aimed at limiting participation and curbing volatility.

The company's January 2023 Shenzhen-traded bond was last quoted at 24.99 yuan on Wednesday, and its Shanghai-traded May 2023 bond traded at 30 yuan.

Mr James Shi, distressed debt analyst at credit analytics provider Reorg, said an Evergrande default has been largely priced into the market, and that a recovery ratio will likely be low in the case of an expected restructuring.

"The market is pretty certain Evergrande will default," said Mr Shi. A very low recovery ratio would be due partly to deep losses at many of Evergrande's non-core businesses, making them hard to liquidate, he added.

A report by CreditSights this week said the probability of liquidation was low if Evergrande defaults.

A Shanghai-based vulture bond fund manager, who specialises in junk-rated bonds, said if Evergrande's bonds fall below 20 US cents on the dollar, the valuation would be attractive for patient investors as a restructuring may take several years.

In the offshore market, Evergrande's 8.75 per cent June 2025 dollar bond was trading at 29.375 US cents yesterday morning, up about four US cents from lows on Wednesday, according to financial data provider Duration Finance.

REUTERS