Today is supposed to be the big day, where Evergrande either makes their coupon payment
on their US dollar denominated bond or defaults. It is worth noting that the covenants on that bond
state that there is a 30-day grace period before a missed payment is considered a default.
As I mentioned in a recent video it's reasonable to expect that payment to not come through today
just because it makes sense for a cash strapped company like Evergrande to hold on to the cash
as long as possible and see what moves the government in Beijing make. Odds are they
will try to buy time and see what happens. The Wall Street Journal is reporting that the
Chinese authorities have told local officials to prepare for the demise of Evergrande.
Local officials described the signals from Chinese authorities as
“getting ready for the possible storm” and said the government told them they should only step in
at the last minute to prevent spillover effects. This implies that the central government may
still have some appetite for a partial bailout, despite the global implications. But it mostly
implies that they will let evergrande go and are preparing to clean up the mess.
The local governments have been ordered to assemble accountants and legal experts to examine
the finances of evergrande in their respective regions. They have been asked to prepare to
take over building projects and to monitor public anger and "mass incidents" - which basically means
protests. Government officials have talked about the importance of migrant workers employed on
Evergrande projects receiving their salaries. The company resolved payment on a local bond
yesterday, helping to lift Asian markets. This announcement — alongside the injection
of $17bn into the banking system by the central bank — lifted Evergrande shares 17 percent
and boosted Chinas Largest property developer Country Garden’s shares by 7 per cent.
We are still in the dark about what will happen with the dollar denominated bonds.
Bloomberg reported this morning that authorities in Beijing told the company not to default on
the dollar-denominated interest payments, so we will have to see what happens.
Evergrande still has a $47m dollar-bond interest payment coming up next week and around $600m due
by the end of the year. In the first quarter of next year, principal repayments of about $3.5bn
come due. (so this story is not over yet.) Foreign investors should not really be too
surprised if battles between classes of debt holders erupt in China.
There is just going to be more political will to pay the small wealth management investors in China
than foreign debt holders regardless of seniority in capital structure.
If international investors are pushed behind domestic Chinese investors
in queues for payment, they will quickly discount all Chinese corporate debt accordingly. Right now,
the price of Evergrande debt is implying that foreign investors will be treated
fairly in the event of a default - the debt is trading at the level of expected recovery.
Most of Evergrandes debt is domestic with only around $20bn having been issued offshore.
US dollar denominated debt issued by other Chinese developers is much larger and trades right
now at around 85 cents on the dollar. In the event of foreign investors getting worse
treatment to domestic Chinese investors, you could expect other Chinese bonds to fall in value to
reflect the likely outcomes. Talk to you later, bye