Chinese investors who own China Evergrande Group Dollar bonds were in the dark Thursday about whether the property giant would make a key interest payment, a major test for the highly indebted developer to avoid a default.
Evergrande needed to make $83.5 million in coupon payments on 23 Sept. for dollar bonds with a face value of $2.03 billion, with Evergrande being at the hook for the next $2.2 million. At late afternoon in New York on Thursday, bondholders hadn t received the money, according to people familiar with the matter.
WORSE The company could call the payments belatedly and has 30 day grace period before bondholders can make a default. A missed payment would set the stage for what could be the largest-ever default of a company in Asia with their dollar Bonds.
Thursday s payment deadline became a focal point for global investors after Evergrande's liquidity worsened significantly over the summer, leading to construction halts at some of its unfinished apartment complexes and sharp sales declines. As recently as June, the company emphasized that it had never missed a bond payment since its founding in 1996.
On Wednesday, Evergrande s flagship property business in mainland China said it had privately negotiated with onshore bondholders to settle a separate coupon payment on a yuan-denominated bond. The developer didn t say if that payment, equivalent to around $35.9 million, would be made in cash or other assets. Evergrande s beaten-down shares fell 2.6% in Hong Kong trading on friday morning and are now down more than 82% this year.
Chinese authorities have asked local governments to prepare for the potential economic and social consequences that could result from Evergrande's downfall, The Wall Street Journal reported earlier on Thursday. That indicates Beijing is reluctant to bail out the developer, but wants to avoid a disorderly unraveling that could create social instability or serious problems for ordinary people who might be affected by the failure of the company.
Evergrande, the world s largest real estate developer, is Shenzhen's more indebted issuer of junk-rated debt, with approximately $19 billion of publicly traded dollar bonds outstanding. Prices of some of those bonds had earlier plunged to around 25 cents on the dollar, reflecting investor extreme pessimism about Evergrande's ability to repay its debts.
This is a controlled, managed default that didn t catch authorities or investors by surprise, said Thu Ha Chow, a senior credit strategist and portfolio manager at Loomis Sayles in Singapore. It is not a Lehman Moment, but the market will be watching for any unintended consequences that might result. Evergrande s troubles have captivated market participants all over the world because of the developer's overheated position in China s credit markets and Asia s outsized housing market.
Then ten years ago, when Lehman Brothers Holdings Inc. failed to secure a U.S. government rescue and defaulted on its borrowings sent shock waves through global stock, bond and money markets.
This time global investors had to prepare for an Evergrande failure. The company s stock and bond prices began sliding during the summer, when the developer's heavy discounting of apartments on sale helped spark concerns that it was under pressure to raise cash to pay its interest bills and other expenses.
Evergrande was recently China s largest developer in the sales market, reporting the equivalent of $111.9 billion in such transactions in 2020. It has built residential complexes in every Chinese province.
Many buyers of its apartment made large cash down payments or paid up in full for homes scheduled to be completed within a few years or not. Evergrande has sold more than 1.4 million apartments valued at $200 billion that it was set to finish, according to estimates by research firm Capital Economics.
It remains unclear how Evergrande will handle its massive liabilities, which reached $304 billion at the end of June, including $88 billion in interests-bearing debt. The developer owes considerable sums of money to suppliers of building materials and contractors that were constructing its apartment complexes and recently resorted to paying some of them with unfinished apartments when it ran short on cash.
Banks who bought Evergrande and investors who lent its securities could still incur some losses, but many market participants believe that a government-led restructuring will prevent a collapse of the company and protect the interests of home buyers and its suppliers.
There have been enough signals out there to point to a default of some form, said Will Malcolm, portfolio manager for emerging market and Asia Pacific equities at Aviva Investors in Singapore, adding that Evergrande is also too systemically important for Beijing to allow it to implode.
Here, there is a big social agenda, he said. The primary concern is that the properties are built by Evergrande and the buyers are protected. And they don t get built unless the suppliers are made whole.