Evergrande Again Nears Default as China Moves to Reassure Markets

By Reuters
Reuters
Reuters
December 6, 2021 Updated: December 6, 2021

HONG KONG—China Evergrande Group shares slumped to a record low on Dec. 6 as authorities intervened to reassure markets after the heavily indebted property developer warned on a coupon payment, pushing it closer to default.

China’s central bank said it would cut reserve requirements for banks while the politburo vowed to promote healthy development of the property sector, reinforcing previous messages to investors that Evergrande’s woes could be contained.

Having made three 11th-hour coupon payments in the past two months, Evergrande again on Dec. 6 faced the end of a 30-day grace period, with dues totalling $82.5 million.

Its shares tumbled by 20 percent following a statement on Dec. 3 that creditors had demanded $260 million and that it could not guarantee funds for coupon repayment, prompting the regime to summon its chairman.

As at the end of Asia business hours, two bondholders said they had yet to receive payments from Evergrande. Evergrande declined to comment.

Once China’s top-selling developer, Evergrande is grappling with over $300 billion in liabilities, meaning a disorderly collapse could ripple through the property sector and beyond.

Regime Acts

Its Dec. 3 statement was followed by one from the Chinese regime in its home province of Guangdong, saying they would send a team at Evergrande’s request to oversee risk management, strengthen internal control, and maintain operations—the state’s first public move to intervene directly to manage any fallout.

The central bank, banking and insurance regulator, and securities regulator also released statements saying risk to the property sector could be contained.

Analysts said the regime’s concerted effort signaled that Evergrande has likely already entered a managed debt-asset restructuring process.

Morgan Stanley said such a process would involve coordination between authorities to maintain operations of property projects, and negotiation with onshore creditors to ensure financing for project completion.

Regulators would also likely facilitate debt restructuring discussion with offshore creditors after operations stabilize, the U.S. investment bank said in a report.

After the flurry of statements, Evergrande’s stock nose-dived 20 percent on Dec. 6 to close at an all-time low of HK$1.81 ($0.23).

Its November 2022 bond—one of two bonds that could go into default upon Dec. 6 nonpayment—was trading at the distressed price of $0.18 on the dollar, compared with $0.20 cents at Dec. 3 close.

“Evergrande’s been trying to sell assets to repay debt, but Friday statement basically says it is going to ‘surrender’ and need help,” said Conita Hung, investment strategy director at Tiger Faith Asset Management. “This sends a very bad signal.”

She said given the large size of its debt, Evergrande’s problems will take years to solve even with state intervention.

Epoch Times Photo
A vendor cycles through the Evergrande Changqing community in the rain in Wuhan, Hubei Province, China, on Sept. 24, 2021. ( Getty Images)

Liquidity Squeeze

The firm is just one of a number of developers starved of liquidity due to regulatory curbs on borrowing, prompting offshore debt defaults, credit-rating downgrades, and sell-offs in developers’ shares and bonds.

To stem turmoil, regulators since October have urged banks to relax lending for developers’ normal financing needs and allowed more real estate firms to sell domestic bonds.

To free up funds, Party Premier Li Keqiang on Dec. 3 said the regime will cut the bank reserve requirement ratio “in a timely way.”

Still, the Chinese regime may have to significantly step up policy-easing measures in the spring to prevent a sharp downturn in the property sector as repayment pressures intensify, Japanese investment bank Nomura said in a report on Dec. 5.

Quarterly dollar bond repayments will almost double to $19.8 billion in the first quarter and $18.5 billion in the second.

Easing measures, such as the ability to sell domestic bonds, are unlikely to help Evergrande refinance as there would be no demand for its notes, CGS-CIMB Securities said on Dec. 6.

Evergrande’s inability to sell projects—with almost zero November sales—also makes short-term debt payments “highly unlikely,” the brokerage said.

Contagion

On Dec. 6, smaller developer Sunshine 100 China Holdings Ltd said it had defaulted on a $170 million bond, due Dec. 5, “owing to liquidity issues arising from the adverse impact of a number of factors including the macroeconomic environment and the real estate industry.”

The delinquency will trigger cross-default provisions under certain other debt instruments, it said.

Epoch Times Photo
A sign on the Kaisa Plaza, a property developed by Kaisa Group Holdings, is seen near its apartment building in Beijing on Dec. 1, 2021. (Tingshu Wang/Reuters)

Last week, Kaisa Group Holdings Ltd., China’s largest offshore debtor among developers after Evergrande, said bondholders had rejected an offer to exchange its 6.5 percent offshore bonds due Dec. 7, leaving it at risk of default.

The developer has begun talks with some of the bondholders to extend the deadline for the $400 million debt repayment, sources have told Reuters.

Smaller rival China Aoyuan Property Group Ltd. last week also said creditors have demanded repayment of $651.2 million due to a slew of credit-rating downgrades, and that it may be unable to pay due to a lack of liquidity.

Aoyuan Chairman Guo Zi Wen on Dec. 3 told executives at an internal meeting to have a “wartime mindset” to ensure operation and project delivery and to fund repayments, a person with direct knowledge of the matter told Reuters.

Such tasks will be priorities for the developer, which will leave bond repayment negotiation to professional institutions in Hong Kong, the person said, declining to be identified as the matter is private.

Aoyuan didn’t respond to a request for comment.

The developer’s share price fell nearly 8 percent on Dec. 6. Kaisa lost 2.2 percent and Sunshine 100 plunged 14 percent.

By Clare Jim

Reuters