Fears grow for China Evergrande after missed interest deadline

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China Evergrande moved closer to the potential default investors feared on Friday, missing a payment deadline in one of the clearest indications to date that the developer whose debt difficulties have spooked markets is in deep trouble.

The company owes $ 305 billion, is cash-strapped, and investors fear a collapse poses systemic risks to China’s financial system and spillovers around the world.

A $ 83.5 million bond interest payment deadline passed without any remarks from Evergrande and bondholders were neither paid nor heard from the company, two people told Reuters familiar with the situation.

The business is now in uncharted waters and is entering a 30-day grace period. It will default if it goes without payment.

“These are worrisome times of silence because no one wants to take huge risks at this point,” said Howe Chung Wan, head of fixed income for Asia at Principal Global Investors in Singapore.

“There is no precedent for this at the size of Evergrande… we have to see in the next ten days or so, before China goes on vacation, how this will play out.”

On Friday, the Chinese central bank again injected liquidity into the banking system, seen as a signal of support for the markets. But authorities have remained silent on Evergrande’s predicament, and Chinese state media have offered no clues about a bailout.

Evergrande appointed financial advisers and warned of a default last week, and global markets fell sharply on Monday amid contagion fears, although they have since stabilized.

The conundrum for policymakers is how fiercely they can impose financial discipline without fueling social unrest, as a horrific collapse in Evergrande could crush a real estate market that accounts for 40% of Chinese household wealth.

Protests from disgruntled vendors, buyers and investors last week illustrated the dissatisfaction that could escalate if default payments trigger crises for other developers.

Evergrande has promised to prioritize these investors and resolved a coupon payment on a domestic bond this week. But he said nothing about the offshore interest payment that was due Thursday or a $ 47.5 million payment due next week.

Bondholders are starting to think it may be a month or so before things get any clearer and markets have already assumed they will take a big haircut.

“Current market prices believe that investors in Evergrande dollar bonds should recover very little,” said Jennifer James, portfolio manager and chief emerging markets analyst at Janus Henderson Investors.

“The most likely outcome is that the company will engage with creditors to reach a restructuring deal,” she said, warning that if such a deal was mismanaged, “the loss of confidence could have contagion effects “.

WIN TIME

Global markets began to recover after the fate of Evergrande triggered a sharp decline, trading on the basis that the crisis can be contained.

Only some $ 20 billion of Evergrande’s debt is owed abroad. Still, the risks at home are considerable due to the risks to the Chinese real estate industry, a vast store of wealth.

“Home sales and investment could inevitably slow further – this would reduce GDP growth by almost a percentage point,” Societe Generale analysts said in a note.

“The longer decision-makers wait to act, the greater the risk of a hard landing.”

So far, there have been few signs of official intervention. The People’s Bank of China’s 270 billion yuan ($ 42 billion) cash injection this week is the biggest weekly sum since January and has helped put a floor under stocks.

Bloomberg Law also reported that regulators have asked Evergrande to avoid a short-term default, citing unnamed people familiar with the matter.

However, the Wall Street Journal said, citing unnamed officials, that authorities have asked local governments to prepare for the fall of Evergrande.

“Given the deliberate pace of Chinese policymaking, the authorities may well choose to buy time,” said Wei-Liang Chang, macro-strategist at DBS Bank in Singapore.

He said they could extend the cash aid during the grace period on Evergrande’s coupon payments, given that no dollar bond maturities are looming until March 2022.

Evergrande shares returned Thursday gains on Friday and fell as much as 12%, while shares in its electric vehicle unit fell 17% to a four-year low. Its bonds fell slightly on Friday and its near-maturity offshore bonds last traded around 30 cents to the dollar.


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