Struggling Evergrande Group says it will make bond payment this week

Signs that a struggling Chinese real estate company will make the promised payment to bondholders have boosted investors as U.S. financial markets are expected to continue to rebound after a steep drop earlier this week.

Evergrande Group said it would pay interest owed to bondholders in China on Thursday, which would help the real estate developer avoid defaulting on billions of dollars in debt. The concerns that the company the collapse could hit Chinese banks and shaking up the country’s vast real estate market have shaken global financial markets.

Evergrande billionaire founder Xu Jiayin expressed confidence in a letter to employees this week that the company will quickly resolve its debt problems.

Economists say Beijing can prevent a Chinese credit crunch, but wants to avoid appearing to be holding a bailout as it tries to force other companies to reduce their reliance on debt . For now, the Chinese government has remained silent about its intervention to restructure Evergrande Group’s $ 310 billion debt.

Evergrande appears to be trying to buy time for “an orderly default rather than a shocking implosion” by paying bondholders in China on time while skipping overseas payments, Mizuho Bank’s Vishnu Varathan said in a report. .

“Avoiding a fault entirely is highly unlikely,” Varathan said.

As of June 30, Evergrande reported 2,000 billion yuan ($ 310 billion) in past due debt owed to bondholders, banks, construction contractors and other creditors. Of this debt, 240 billion yuan ($ 37.3 billion) was due within one year, nearly triple the 86.8 billion yuan ($ 13.5 billion) in Evergrande’s cash. , according to a company financial report.

If regulators get involved, they will likely focus on protecting families who have paid for apartments that are yet to be built, economists say. This would result in greater losses for banks, construction companies and other creditors.

Deep in the red

Evergrande, which ratings agency S&P Global is the world’s most indebted real estate developer, has announced it will make a payment due on a 4 billion yuan ($ 620 million) bond denominated in Chinese yuan .

A company statement said the details had been “worked out in off-market negotiations,” but gave no indication if it meant a change in payment. The bond has an interest rate of 5.8%, which would make the normal amount owed at 232 million yuan ($ 36 million) for one year.

Evergrande did not say whether it would make a separate payment of $ 83 million due Thursday to holders of a U.S. dollar-denominated bond maturing in March.

Evergrande appears to favor Chinese creditors to negotiate with a circle of friendly banks and other institutions that hold its debt, Mizuho’s Varathan said. He said that “maximizes creditors action relief” in China.

A default on a bond in China would trigger a cross default on a bond abroad, but missing an overseas payment does not have the same effect in China, according to Varathan. He said it would be more difficult to renegotiate with a pool of “diverse and scattered” investors overseas.

The main benchmark of the Chinese stock market, the Shanghai Composite Index, closed up 0.4% after the announcement. Hong Kong’s financial markets, which have been rocked by Evergrande’s predicament, have been closed for vacation.

“No Lehman moment”

Some commentators suggest Evergrande could become China’s ‘Lehman moment’, referring to the bankruptcy of Wall Street bank Lehman Brothers, a precursor to the 2008 crisis. But economists say the risk of market contagion global is low.

“The Evergrande problems are not a time for Lehman, but they present a significant risk of international contagion in emerging markets, which investors would be reckless to ignore,” said Udith Sikand, analyst at the research firm. Gavekal investment, in a report.

Evergrande has sold billions of dollars in assets to repay debt since regulators tightened borrowing limits on China’s real estate sector last year. The company is one of China’s largest private sector conglomerates, with more than 200,000 employees, 1,300 projects in 280 cities and assets worth 2.3 trillion yuan ($ 350 billion).

Other large developers such as Vanke Co., state-owned Poly Group, and Wanda Group have not reported similar issues. But hundreds of small developers have shut down since regulators in 2017 began tightening control over fundraising tactics such as selling apartments before construction begins.

Beijing authorized the first communist-era corporate bond default in 2014 in an attempt to force borrowers and lenders to be more disciplined. Defaults by private sector borrowers were gradually allowed to increase, but the government organized bailouts for state-owned enterprises.

“We expect a managed restructuring of the business that prioritizes home buyers and, after them, suppliers,” Mark Williams, chief economist for Asia at Capital Economics, said in an analysis. “Bondholders face big haircuts. The company’s equity may be worth next to nothing. But policymakers will use their control of the banking system to prevent financial strains from spreading beyond developers. with high leverage. “

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