China Evergrande’s domestic debt deal calms immediate contagion concern

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China Evergrande on Wednesday agreed to settle interest payments on domestic bonds while the Chinese central bank injected cash into the banking system, temporarily calming fears of an imminent contagion from the debt-laden property developer.

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Asia’s largest junk-bond issuer, Evergrande, is so embroiled with China’s broader economy that its fortunes have put global stock and bond markets on tenterhooks because late loan payments could trigger so-called cross-defaults.

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

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In an effort to reassure investors, the People’s Bank of China injected 90 billion yuan into the banking system, signaling support for markets as they expected one of China’s biggest debt restructurings to take place.

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Explainer: What’s behind Evergrande’s debt struggle and why is it plaguing investors around the world?

Evergrande is on the verge of collapse. Will China take steps to avoid ‘Lehman Moment’?

Evergrande is scrambling to avoid defaulting on a number of bonds with payments due this week and its main entity, Hengda Real Estate Group, said on Wednesday that it had “settled” a coupon payment of its Shenzhen-traded 5.8 percent on September 2025 on Thursday. solved”. Bond, via “Private Negotiation”.

It did not specify how much interest would be paid or when, nor did Hengda mention Evergrande’s other stressed loans, making it unclear whether the $83.5 million in dollar bond interest payments due Thursday would be due. What does it mean?

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

But engagement with bondholders, a common way to avoid default, tops this week’s pledge of President Hui Ka Yuan that Evergrande will “come out of its darkest moment,” cheered investors and buoyed markets more broadly. cooled off.

Singapore-based Dexter Tan, a senior fixed income analyst at BondSupermart.com, said: “These developments suggest that the company is taking control of the situation and doing its best to work out a settlement with creditors.”

Evergrande, which epitomized the lend-to-build business model and was once China’s best-selling developer, also has a $47.5 million dollar-bond interest payment next week.

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“We don’t have a clear picture of how Evergrande disposes of its onshore coupons,” said Singapore-based Chuano Zhou, a credit analyst at Lucor Analytics.

“It doesn’t look like a cash payment. It may still miss the coupon on the offshore bond due tomorrow.

Hong Kong shares of Evergrande did not trade due to a public holiday, but were up 40 percent to 0.38 euros ($0.45) in Frankfurt.

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

In the broader market, the US dollar slipped while the S&P 500 rebounded from recent losses.

Breakdown

Analysts underestimate the risk that a collapse threatens the “Lehmann moment,” or liquidity crisis, which freezes the financial system and spreads globally.

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According to Refinitiv data, only $20-billion is outstanding offshore on $305-billion of outstanding loans.

But the risk of failure remains high, especially if offshore bondholders are less willing to cut deals in China, and the fallout has begun to trigger shocks in the property market of the world’s second-largest economy.

“Between Evergrande now being compared with the collapse of Lehman Brothers and the crash in the US housing market, many analysts have dismissed this comparison,” Nordea Asset Management’s Sebastian Galli wrote in a recent note. “The reality is it will take weeks to ascertain the impact on growth given the impact on the real estate market.”

There is also growing political pressure to act as the rage of retail investors sinking their savings into Evergrande properties or wealth management products.

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

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

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

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