Chinese real estate bond investors face a plethora of headwinds, with a potential default by China Evergrande Group (Evergrande) at the forefront of this debacle.
Uncertainties over Evergrande’s $ 11.9 billion bonds maturing over the next two years, according to Fitch Ratings, cloud the outlook for the industry’s $ 232 billion cross-border bond outstanding.
At this stage of writing, Evergrande has yet to distribute the coupon payment which was due on September 23. He’s now entered the 30-day grace period, which coincides with his next coupon date – Wednesday, September 29, for $ 45 million.
China Evergrande is due to pay coupon interest on five US dollar bond issues (with the code EVERRE) in September and October. It is now clear that Evergrande will use the 30 day grace period to see if there are any further developments or instructions from the government. We believe the group will handle these coupon payments as a whole, instead of individual refunds.
Earlier, there had been news that the Chinese government was advising Evergrande to avoid defaulting on short-term bonds. We believe the group is trying to avoid defaults on its government bonds if they still have liquidity, in order to avoid a series of cross defaults and lawsuits to liquidate Evergrande’s offshore assets.
For example, Hengda Real Estate (the onshore real estate division of Evergrande) announced that it had resolved the coupon payment through negotiations with bondholders outside the clearing house.
Since this payment method is special, we believe it is not a full cash settlement. The onshore bondholders are mainly institutional investors located in China, which facilitates negotiations.
On the other hand, it would be difficult to apply a similar approach for holders of US dollar bonds which are mainly foreign fund houses, private banks, retail investors, etc.
The attitude of Evergrande management towards the use of available money is essential, and prioritizing real estate projects for homebuyers does not bode well for bondholders.
In addition to the previous pledge signing ceremony to promise buyers that construction will continue, Evergrande held another internal meeting on the night of September 22, urging company executives to resume construction and secure delivery. properties.
Caixin also said that authorities in regions such as Guangzhou, Zhuhai and Jiangsu have already set up special accounts to protect funds intended for real estate developments and ensure that the money is not diverted to creditors.
Evergrande’s asset disposal plan is not going smoothly, as we haven’t seen any major transactions in recent months.
On September 29, the group finally sold about 20 percent of its stake in Shengjing Bank to a state-owned company in Shenyang for about 10 billion yuan. Nevertheless, the proceeds will be used to settle the relevant financial debts owed to the Shengjing Bank.
Looking ahead, the potential buyers of Evergrande’s assets are still local state-owned companies, but we need to understand that struggling money is not easy.
Even if a White Knight appears, Evergrande should still be forced to reduce his existing debts first.
Therefore, not all capital injection or restructuring news is positive, and investors need to identify themselves.
In the event of default of the obligations, the offshore bondholders will have the right to claim the onshore and offshore assets held by China Evergrande. However, since the onshore assets are mainly made up of distressed Hengda Real Estate, it should be more difficult to recover.
Therefore, we still believe that the most important assets of the group are the equity participation of several listed companies.
That being said, instead of a total liquidation, we still believe that the most possible outcome now is debt restructuring. Referring to past cases, it usually takes one to two years for a repayment plan to be developed during the restructuring process.
While Evergrande is in the spotlight and we expect creditors to be more aggressive in their actions, investors should always consider the value of time.
Our team will continue to monitor the situation and provide updates. Investors who want to know more can also read our previous updates: “Evergrande’s woes get worse” and “A quick read of the long-awaited interim results of Evergrande”.