China's Evergrande to pay interest on dollar bond, sources say

527
4
China's Evergrande to pay interest on dollar bond, sources say

Logo of China Evergrande Group seen on the Evergrande Center in Shanghai.

HONG KONG Reuters - China Evergrande Group has supplied funds to pay interest on a dollar bond, a person with direct knowledge of the matter told Reuters on Friday, days before a deadline that would have seen the developer plunge into formal default.

News of the remittance will likely bring relief to investors and regulators worried about a default's wider fallout in global markets, adding to reassurance from Chinese officials who have said creditors' interests would be protected.

It is China's second largest property developer, with $110 billion in sales last year, $355 billion in assets and more than 1,300 developments nationwide. Evergrande grew rapidly through a loan-supported land-buying spree and selling apartments quickly at low margins. It employed 163,119 staff as of June-end, its interim report showed.

Slowing growth has seen it branch into businesses such as insurance, bottled water, soccer and electric vehicles EVs In September last year, a leaked letter showed Evergrande pleading for government support to approve a now-dropped backdoor stock market listing. Sources told Reuters the letter was fake; Evergrande called it authentic.

In June, Evergrande said it did not pay some commercial paper on time and in July a court froze a $20 million bank deposit held by the firm at the bank's request.

The firm said in late August that construction at some of its developments had halted due to missed payments to contractors and suppliers. It sought repayment extension for a trust loan in early September, sources told Reuters, and media reports said Evergrande would suspend interest payments due on loans to two banks that month.

Liabilities, including payables, totalled 1.97 trillion yuan $306 billion at end-June - equivalent to 2% of China's gross domestic product.

Evergrande accelerated efforts to reduce debt last year after regulators introduced caps on three debt ratios, dubbed the three red lines It has been aiming to meet those requirements by the end of 2022.

It offered steep discounts on commercial developments to spur sales and sold the bulk of its residential properties. Since the second half of 2020, it has raised a $555 million secondary share sale and raised $1.8 billion by listing its property management unit, while its EV unit raised a $3.4 billion stake.

On Sept. 14, it said asset and equity disposal plans had failed to make material progress.

In 2018 the Central Bank of China said that companies including Evergrande could pose systemic risk to China's financial system.

The firm's liabilities involved as many as 128 banks and over 121 non-banking institutions, the leaked letter showed.

Late repayments could trigger cross-defaults as many financial institutions are exposed through indirect loans and direct holdings through different financial instruments.

In Hong Kong, Evergrande owns an office tower and residential development as well as two nearly completed residential developments, plus a vast undeveloped land parcel.

It has spent billions of dollars acquiring stakes in automobile technology developers, including Sweden's NEVS, the Netherlands' e-Traction and Britain's Protean. It also has joint ventures with Sweden's Hofer and Germany's Koenigsegg.

In comments reported by state media Xinhua and echoing words from the central bank, Vice Premier Liu He told a Beijing forum on Wednesday that the risks were controllable and that reasonable capital demand from property firms was being met.

The chairman of China's securities regulator, Yi Huiman, said the authorities would properly handle the default risks and look to curb excessive debt more broadly.

Central bank Governor Yi Gang said on Sunday that the world's second largest economy is doing well but faces challenges such as default risks for certain firms due to mismanagement. Yi said China will fully protect and respect the rights of Evergrande's creditors and asset owners, in line with repayment priorities laid out by China's laws.

Evergrande remitted $83.5 million to a trustee account at Citibank on Thursday, the source told Reuters, allowing it to pay all bondholders before the payment grace period ends on Saturday.

Still, the developer will need to make payments on a string of other bonds, with the next major deadline to avoid default only a week away and little known about whether it is in a position to pay those debts.

Evergrande missed coupon payments totalling nearly $280 million on its dollar bonds on Sept. 23, Sept. 29 and Oct. 11, beginning 30 day grace periods for each.

After a grace period ends, non-payment would result in cross-default and trigger formal default provisions for its other dollar bonds.