Heading into today, the fate of China's insolvent property giant, Evergrande, was once again uncertain, with Reuters reporting earlier today that some bondholders of the cash-strapped company had still not received coupon payments by the end of 30-day grace periods at close of Asia business on Wednesday, pushing the developer again to the edge of default. This despite the company recently selling two of its Gulfstream private jets, and despite a report from Hong kong's HK01 media that Evergrande Chairman Hui Ka Yan had pledged a second house on the peak in Hong Kong as collateral to Orix Asia Capital for a loan.
Evergrande has been stumbling from deadline to deadline in recent weeks as it grapples with more than $300 billion in liabilities, $19 billion of which are international market bonds. While the company had not defaulted on any of its offshore debt obligations, a 30-day grace period on coupon payments of more than $148 million on its April 2022, 2023 and 2024 bonds ended on Wednesday. A failure to pay would result in a formal default by the company and trigger cross-default provisions for other Evergrande dollar bonds, exacerbating a debt crisis looming over the world's second-largest economy.
And then, just as speculation swirled that today would finally be the day Evergrande collapsed, the insolvent debtor looked once again set to avert a default in its biggest test since the property developer’s debt crisis began.
According to Bloomberg, customers of international clearing firm Clearstream received overdue interest payments on the three U.S. dollar bonds issued by Evergrande, a spokesperson for Clearstream said. Two investors that hold two of the bonds confirmed that they received the payments, asking not to be identified because they weren’t authorized to speak publicly.
The latest payment means that the embattled developer once again made overdue coupon payments totaling $148.1 million to offshore creditors literally minutes before the end of 30-day grace periods on Wednesday, after missing the initial interest deadlines last month.
The property giant pulled back from the brink of default in October by paying other coupons before the end of its grace period.
However, with billions in coupons and maturities due in coming months, the crisis at Asia’s largest junk bond issuer is hardly over, as it grapples with more than $300 billion in liabilities.
Countless other developers have also fallen into distress amid a crackdown on speculation and leverage following years of debt-fueled expansion. A string of defaults and downgrades in the property industry in recent weeks pushed yields on junk dollar bonds from Chinese issuers to the highest in at least a decade over 24%. The contagion has even spread to other areas of the credit market, including investment grade companies that were previously seen as untouchable by panicked sellers.
On Monday, two holders of other dollar notes sold by a unit of China Evergrande said they hadn’t received payment for coupons that were officially due Saturday. Both of those coupons also have a 30-day grace period before any missed payment would be considered a default
Authorities have sought to limit the fallout from the wider property market distress, with the central bank injecting liquidity into the financial system.
Separately, Chinese developers’ bonds and stocks rallied sharply Wednesday after the Securities Times said authorities are likely to loosen controls for the nation’s real estate companies to issue local-currency notes, part of efforts to prevent a further deterioration in their financing. Later in the day, the New York Times reported that the Chinese central bank is considering easing rules to let struggling developers sell assets to avoid defaults, the New York Times reports, citing unidentified people with knowledge of the discussions.
The People’s Bank of China is considering allowing the buyers of assets from financial strained property firms to take over the assets without having the projects’ associated debt affect their own debt ratios; the buyers would likely be state-owned firms. Current rules, put in place last year, are so strict that they have hindered the ability of developers such as China Evergrande to sell assets to pay debts.
As for Evergrande, this time the company may have made a payment but creditors shouldn't expect that these piecemeal payments will continue: as the WSJ reported, the Chinese state is quietly dismantling the giant developer slowly and behind the scenes:
The plan, according to people familiar with the matter and official government statements, is to manage a controlled implosion by selling off some Evergrande assets to Chinese companies while limiting damage to home buyers and businesses involved in its projects.
Chinese authorities must do this without bringing down the country’s epic property boom. Evergrande is struggling to manage roughly $300 billion in liabilities, including close to $20 billion in outstanding U.S. dollar bonds.
Looking out for foreign investors isn’t a priority, WSJ sources citing people familiar with the matter perhaps because replacing one set of broke creditors with another set of soon to be broke creditors would be too much irony even for China. Still, Beijing is closely monitoring the situation, because authorities need credit markets to be healthy to prevent other property developers from failing and because they worry about China’s image, one of those people said.
The bottom line: this will be one drawn out default-cum-nationalization as it could take years to take the company apart, and many details are still being worked out, people familiar with the matter say. It’s possible some version of Evergrande could survive, though it would likely be much smaller.
Much of the work so far has focused on Evergrande’s hundreds of stalled projects, a process that will likely involve bringing in other developers to take over.