Evergrande’s domestic bond payment deal soothes fears, for now

0
26

Article content

SINGAPORE/SHANGHAI — China Evergrande Group’s main unit said on Wednesday it negotiated a deal with bondholders to settle interest payments on a domestic bond, which helped calm fears of an imminent default that could unleash global financial chaos.

China’s central bank also injected 90 billion yuan ($14 billion) into the banking system, in a sign of support as the country’s financial markets reopened and steadied after a two-day break for the Mid-Autumn Festival.

Heavily indebted Evergrande is so intertwined with China’s broader economy – from retail investors to infrastructure firms that are a gauge for commodity demand – that its fate and fears of contagion have kept global stock and bond markets on tenterhooks.

Advertisement

Article content

Hengda Real Estate Group said in statement that it would settle the coupon payment due Thursday on its Shenzhen-traded 5.8% September 2025 bond, adding that the bond “has already been resolved through private negotiations.”

It did not provide further detail and it was unclear whether the negotiations suggested any improvement to Evergrande’s financial health or progress toward a restructure.

The company is due to pay 232 million yuan ($36 million) in interest on the bond by Thursday.

Evergrande has made no mention of an $83.5 million dollar bond interest payment also due on Thursday or $47.5 million due next week. But Hengda’s announcement seemed to stabilize broader market jitters and S&P 500 futures rose.

Advertisement

Article content

“We are still trying to understand what this payment means for the other bonds,” said a source familiar with the situation who declined to be identified as they are not authorized to speak to the media.

“But I imagine they would want to stabilize the market and make other coupon payments, given the close scrutiny.”

Evergrande, which epitomized the borrow-to-build business model and was once China’s top-selling developer, owes about $300 billion, mostly to onshore investors.

Analysts have been downplaying the risk that its possible collapse threatens a “Lehman moment,” or liquidity crunch, which freezes the financial system and spreads globally. But concerns remain over the fallout if a collapse triggers a property crash in the world’s second-largest economy.

Advertisement

Article content

The PBOC’s cash injection suggested some official attempts to contain the crisis, said Yasutada Suzuki, head of EM investment at Sumitomo Mitsui Bank in Tokyo.

“I suspect that is to deal with any concerns about Evergrande and it shows the PBOC is trying to support the (money) market,” he said.

FED MEETING

Fed Chair Jerome Powell will likely be asked about the fallout from Evergrande when he speaks at 1830 GMT after the Fed’s two-day meeting.

Despite the looming default, 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 https://www.morningstar.hk/hk/news/215418/whos-buying-evergrandes-bonds.aspx?lang=en-hk data and a blog post showed.

Advertisement

Article content

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

Since Sept. 17, Evergrande’s onshore bonds have been only tradeable through negotiated transactions, and Refinitiv data showed no trades recorded on Wednesday. Dollar bonds were steady in thin trade and its Hong Kong-listed shares did not trade due to a public holiday. Evergrande shares in Frankfurt jumped 20%.

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.

BNP Paribas estimated less than $50 billion of Evergrande’s debt is financed by bank loans, suggesting the banking sector will have a sufficient buffer to absorb bad debts.

“I would characterize Evergrande as a telegraphed and controlled detonation,” said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, who does not have a position in the company. ($1 = 6.4665 Chinese yuan)

(Reporting by Anshuman Daga in Singapore, Andrew Galbraith and Samuel Shen in Shanghai. Additional reporting by Hideyuki Sano in Tokyo. Writing by Anne Marie Roantree and Tom Westbrook. Editing by Richard Pullin and Jacqueline Wong)

Advertisement

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

    Comments

    Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.