Evergrande's Vague Filing Spotlights Risk in China Bond Market

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by Tyler Durden
Wednesday, Sep 22, 2021 - 11:30 AM

By Shen Hong, Bloomberg Markets Live commentator and reporter

A vaguely worded bond filing by China Evergrande Group is a fresh reminder of the risk when investing in the country’s onshore credit market.

Poor or insufficient information disclosure has long been a major obstacle in expanding the role of the yuan debt market. It’s also a big turn-off for global investors seeking exposure to domestic corporate bonds at a time of surging defaults.

In its filing to the Shenzhen Stock Exchange, the Evergrande unit said that it reached an agreement with yuan bondholders on an interest payment due Sept. 23. It, “has been resolved via negotiations off the clearing house,” but didn’t specify how much or when it will pay the 232m yuan coupon at stake.

The language is potentially ominous because under normal circumstances, Chinese bond issuers would simply transfer money to a clearing house to complete payments. The “off-the-clearing house” approach usually means direct but delayed, or partial payment to bondholders. There could even be a lower interest rate involved. In short: it’s one way to avoid being called a defaulter.

Evergrande may have secured bondholders’ agreement with a payment extension or at least succeeded in asking them not to act until compromise is reached, even as it misses the payment due Thursday.

Even the generic, templated language of such exchange filings can be baffling too. The notice starts with a summary of the bond’s key terms, ranging from its code to which bondholders are qualified for receiving coupons. It also says the issuer “will pay the interest” on the bond on Sept. 23”, before adding that “below is the announcement on the relevant matter”. It perhaps could have been more clearly written as the issuer is “obligated to pay the interest”.

A closer look at the language in the prospectus of the Evergrande bond in question muddies the waters further. Puzzling language isn’t uncommon among issuers of Chinese local bonds, although some improvement has been seen after Beijing stepped up oversight of information disclosure.

But for now, we may never find out what exactly the deal is between Evergrande and its bondholders as the company isn’t required to disclose further about such “off-the-clearing house” arrangements. The developer’s crisis isn’t just a bad moment for China’s property sector. It also hurts confidence in the world’s second-largest credit market.