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Evergrande domestic debt deal calms immediate contagion concern

HONG KONG: China Evergrande agreed to settle interest payments on a domestic bond on Wednesday (Sep 22), while the Chinese central bank injected cash into the banking system, soothing fears of imminent contagion from the debt-laden property developer.

Evergrande, Asia's biggest junk bond issuer, is so entangled with China's broader economy that its fate has kept global stock and bond markets on tenterhooks as late debt payments could trigger so-called cross-defaults.

Many financial institutions have exposure to Evergrande through direct loans and indirect holdings, while any defaults will also trigger sell-offs in the high-yield credit market.

In an effort to reassure investors, the People's Bank of China's injected 90 billion yuan (US$14 billion) to the banking system, signalling support for markets as they braced for what is expected to be one of China's largest-ever debt restructurings.

Evergrande is scrambling to avoid defaulting on a number of bonds with payments due this week and it and its main unit, Hengda Real Estate Group, said on Wednesday it had "resolved" one coupon payment due on Thursday on its Shenzhen-traded 5.8 per cent September 2025 bond , via "private negotiations".

It did not specify how much interest would be paid or when, nor did Hengda mention Evergrande's other pressing debts, leaving it unclear what this means for US$83.5 billion in dollar bond interest payments due on Thursday.

Evergrande did not immediately respond to questions about its deal or its intentions.

But engagement with bondholders, a common way to avoid default, on top of chairman Hui Ka Yuan's vow this week that Evergrande would "walk out of its darkest moment", cheered investors and soothed markets more broadly.

"These events seem to suggest that the company is taking control of the situation and is trying its best to work out a solution with creditors," Singapore-based Dexter Tan, a senior fixed income analyst at Bondsupermart.com, said.

Evergrande, which epitomised the borrow-to-build business model and was once China's top-selling developer, also has a US$47.5 million dollar-bond interest payment due next week.

"We do not have a clearer picture as how Evergrande settled its onshore coupon," Singapore-based Chuanyo Zhou, a credit analyst at Lucror Analytics, said.

"It doesn't look like a cash payment. It may still miss the coupon on offshore bonds due tomorrow."

Evergrande's Hong Kong shares did not trade due to a public holiday but rose 40 per cent in Frankfurt to €0.38 (US$0.45).

Its dollar bonds maturing next year and in 2024 remained below 30 cents on the dollar.

In the wider market, the US dollar slipped and S&P 500 futures rose in Asia and European trade.

BREAKDOWN

Analysts have been downplaying the risk that a collapse threatens a "Lehman moment", or liquidity crunch, which freezes the financial system and spreads globally.

Only about US$20 billion of US$305 billion outstanding debts is owed offshore, according to Refinitiv data.

But the risk of failure remains high, particularly if offshore bondholders are less willing than those in China to cut deals, and the fallout has already begun to trigger tremors in the property market of the world's second-largest economy.

"Developers there have long claimed that the success of their business is driven by the three carriages: high turnover, high gross profit, and high leverage," said Michael Pettis, a nonresident senior fellow at the Carnegie–Tsinghua Center for Global Policy, in a blog post.

"But all of these proverbial carriages are breaking down as the effects of Evergrande's crisis spread."

There is also mounting political pressure to act as the anger of retail investors with their savings sunk in Evergrande properties or wealth management products swells.

Asked at a regular daily briefing on Wednesday whether China would take measures to intervene, foreign ministry spokesman Zhao Lijian only referred to the "responsible departments".

Despite the risks, some funds have been increasing their positions in recent months. BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande's debt, Morningstar data and a blog post showed.

Other bondholders include UBS Asset Management and Amundi, Europe's largest asset manager.

Evergrande is set to make its onshore bond payment on time, but the developer has not indicated whether it will be able to pay US$83.5 million in interest due on its March 2022 bond on Thursday. It has another US$47.5 million payment due on Sep 29 for March 2024 notes.

Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

Evergrande missed interest payments due Monday to at least two of its largest bank creditors, Bloomberg reported on Tuesday, citing people familiar with the matter. The missed payments had been expected as China's housing ministry had said that the company would be unable to pay on time, Bloomberg said.

As investors and policymakers around the world tried to assess the potential fallout, Securities and Exchange Commission (SEC) Chair Gary Gensler said the US market is in a better position to absorb a potential global shock from a major company default than it was before the 2007-2009 financial crisis.

FED MEETING

Fed Chair Jerome Powell will likely be asked about the fallout from Evergrande when he speaks after the Fed's two-day meeting that wraps up on Wednesday at 1800 GMT.

Despite the looming default, some funds have been increasing their positions in recent months. Fund giant BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande's debt, Morningstar data and a blog post showed.

Other bondholders include UBS Asset Management and Amundi, Europe's largest asset manager.

In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors.

S&P Global Ratings said on Monday it believed the Chinese government would only act in the event of a far-reaching contagion posing systemic risks to the economy.

"I would characterise Evergrande as a telegraphed and controlled detonation," said Samy Muaddi, the portfolio manager of the US$5.1 billion T Rowe Price Emerging Markets Bond fund, who does not have a position in the company.

BNP Paribas estimated in a research note that less than US$50 billion of Evergrande's US$300 billion outstanding debt is financed by bank loans, suggesting the Chinese banking sector will have a sufficient buffer to absorb potential bad debts.

Citigroup subsidiaries serve as trustee and payment agent for a China Evergrande bond that matures in March 2022 and has US$83.5 million in interest coming due on Thursday.

"We do not have any direct lending exposure to Evergrande; our indirect exposure through counterparty credit risk is small and with no single significant concentration," Citigroup spokesperson Danielle Romero-Apsilos said in an email on Tuesday. She declined to comment on Evergrande's scheduled payments.

In an effort to revive battered confidence in the firm, Evergrande Chairman Hui Ka Yuan said in a letter to staff that Evergrande will fulfil responsibilities to property buyers, investors, partners and financial institutions.

Evergrande's Hong Kong-listed shares fell as much as 7 per cent on Tuesday, having tumbled 10 per cent the previous day, on fears its US$305 billion in debt could trigger widespread losses in China's financial system in the event of a collapse. The Hong Kong stock market was closed on Wednesday for a holiday.

Source: Reuters/aj

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