- No sign that Evergrande is paying interest on dollar bonds
- The company has a grace period of 30 days prior to default on the bonds
- PBOC injects cash into the banking system; Evergrande’s shares are falling
SINGAPORE, Sept 24 (Reuters) – China’s Evergrande on Friday came close to possible investor-feared defaults as interest rates expired without any announcement from the real estate giant whose debt mountain has scared global markets .
The company owes $ 305 billion, has run out of cash and investors worry that a collapse could pose systemic risks to China’s financial system and have repercussions worldwide.
A deadline to pay $ 83.5 million in bond interest passed without any comment from Evergrande or any sign of payment from the bondholders. The company is now in unknown waters and is entering a 30-day grace period. It will be by default if it goes unpaid.
“These are periods of strange silence, as no one wants to take massive risks at this stage,” said Howe Chung Wan, head of Asian fixed income at Principal Global Investors in Singapore.
“There are no precedents the size of Evergrande … we have to see in the next ten days or so, before China goes on holiday, how this will work.”
China’s central bank re-injected cash into the banking system on Friday, seen as a signal of market support. But authorities have kept quiet about Evergrande’s situation and Chinese state media have given no clues about a rescue package.
Evergrande (3333.HK) appointed financial advisors and warned of default last week, and world markets fell sharply on Monday amid fears of contagion, though they have since stabilized.
The enigma for policymakers is the ferocity with which they can impose financial discipline without fueling social unrest, as an ugly collapse in Evergrande could crush a real estate market that accounts for 40% of the wealth of Chinese households. Read more
Protests from disgruntled suppliers, homebuyers and investors last week illustrated the discontent that could spiral in the event that a defect caused crises in other developers. Read more
Evergrande has pledged to prioritize these investors and this week settled on a coupon payment in a national bond. But he has said nothing about the offshore interest payment that was to be paid on Thursday or about a $ 47.5 million payment next week.
Bondholders are starting to think it may be a month or so before things become clearer and markets have already assumed they will cut a lot. Read more
“Current market prices estimate that investors in Evergrande’s dollar bonds are likely to recover very little,” said Jennifer James, portfolio manager and leading emerging market analyst at Janus Henderson Investors.
“The most likely outcome is for the company to keep in touch with creditors to reach a restructuring agreement,” he said, warning that if this agreement is poorly controlled, “the loss of trust could have contagious effects.”
PLAY FOR TIME
World markets have begun to recover after the Evergrande situation caused a sharp sell-off, operating on the basis that the crisis could be contained.
Only about $ 20 billion of Evergrande’s debts are owed offshore. Still, the risks at home are considerable because of the risks to China’s real estate, a department store of wealth.
“Housing sales and investments could inevitably decline further, which would account for almost one percentage point of GDP growth,” Societe Generale analysts said in a note.
“The longer policy makers wait before acting, the greater the risk of landing.”
So far there has been little evidence of official intervention. This week’s 270 billion yuan ($ 42 billion) cash injection from the People’s Bank of China is the largest weekly sum since January and has helped put a floor below stocks.
The Bloomberg Act also reported that regulators had asked Evergrande to avoid a short-term default, citing anonymous people familiar with the matter.
However, the Wall Street Journal said, citing unnamed officials, that authorities had asked local governments to prepare for the fall of Evergrande. Read more
“Given the deliberate pace of Chinese policy-making, the authorities could choose to play for time,” said Wei-Liang Chang, macro-strategist at DBS Bank in Singapore.
He said they could extend liquidity assistance during the grace period of Evergrande coupon payments, as no dollar bond maturities were expected until March 2022.
Shares of Evergrande returned some gains on Thursday and fell 6%, while shares of its electric vehicle unit (0708.HK) fell 18% to a four-year low. Its bonds fell slightly on Friday and its offshore bonds with imminent outstanding payments, were last traded at around 30 cents.
(1 $ = 6.4589 Chinese yuan renminbi)
Report by Tom Westbrook. Additional reports by Clare Jim in Hong Kong and Andrew Galbraith in Shanghai; Edited by Stephen Coates
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