Trust firms that have issued at least $5 billion in high-yield products linked to China Evergrande Group are bracing for a cascade of losses after the cash-strapped developer said it may no longer be able to meet its financial obligations.
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At least three firms, including Citic Trust Co., China Foreign Economy and Trade Trust Co. and National Trust, have warned clients that they risk missing payments on Evergrande products due to the developer's strained finances and will take legal action to protect investors, people familiar with the matter said, and asked not to be named discussing private deliberations. The people said that at least five trust companies held emergency meetings over the weekend to discuss how to handle potential disputes with investors.
A key group of onshore Evergrande creditors responded to a Friday statement from the developer in which it acknowledged for the first time the need to restructure offshore debt. One person said that if Evergrande is declared in default on its bonds, a wave of cross defaults could cause trusts to have limited room to negotiate extensions with investors or bridge over payment lapses by dipping into their own pockets.
There was no immediate response from any of the trust firms. Evergrande didn't respond immediately to a request for comment.
Evergrande counts trust companies, which pool money from wealthy individual investors as an important source of funding - accounting for about 40% of borrowings at the end of 2019 when it last disclosed the figures. The firms have been reducing their exposure to Evergrande and its peers since then, but they continue to be huge lenders with at least $12 billion in developer-linked trust payments due this month.
The threat of contagion into the $3 trillion trust industry will put pressure on policy makers to reduce the crunch in the real estate sector, which has already triggered protests by home-buyers and investors in wealth management products sold by Evergrande and another embattled developer Kaisa Group Holdings Ltd.
Evergrande has done business with 68 trust companies in China. There were $1.8 billion in trust loans due to maturity in the fourth quarter, with another $5 billion due over 2022 and 2023, according to Use Trust, a company that tracks the industry. The data only covers trusts sold to retail investors and not so-called single trusts, which are private placements and make up the bulk of Evergrande s financing through the products.
If holders of an Evergrande bond declare it in formal default defaults, the firm's other debt instruments, including trusts, would automatically be triggered, according to Daniel Fan, an analyst at Bloomberg Intelligence. The company would have to deal with huge debt pressure at the end of the day. Evergrande plans to include all its offshore public bonds and private debt obligations in a restructuring that may rank among the nation's biggest ever, people familiar with the matter said. The people who asked not to be identified discussing private information said it would include public notes sold by Evergrande and unit Scenery Journey Ltd. Grace periods for interest payments on two notes from Scenery Journey end Monday and could mark the firm's first default on public debts.
The central bank and the securities regulator tried to reassure investors after Evergrande made a statement late on Friday, reiterating that broader risks to the economy can be contained.
Social stability is top of mind for regulators. Evergrande missed payments on 40 billion yuan $6.2 billion of wealth management products sold to retail investors, including its own employees, sparking protests earlier this year. Some investors in trust products are high-net worth clients of commercial banks, which means that the spillover could extend beyond the already embattled trust sector, people familiar with the matter said.
The government of Guangdong, the southern province where Evergrande is based, summoned founder Hui Ka Yan to express concern over the company's Friday announcement and said it would send a team to the developer to ensure normal operations.
Iris Chen, a credit desk analyst at Nomura Securities Co, said that more government intervention on the operations side is needed to secure home delivery and prioritize supply chain payments and wealth management products.
Trust firms have defaulted on more than $10 billion of developer-linked products that were seen by wealthy Chinese and institutions as a place to park money this year. The firms have tried to reduce their outstanding loans by 17% by June from a year ago, according to the China Trustee Association.
The potential damage is already seeingping out. Jiangsu Yanghe Brewery Joint-Stock Co. said late Friday that payment on an Evergrande-linked trust product purchased from Citic Trust is now overdue. None The Fall of a Russian Cyberexecutive Who Went Against the Kremlin