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China Evergrande braces for debt deadline after doubting ability to pay
December 6, 20213:49 AM ESTLast Updated an hour ago
China
China Evergrande braces for debt deadline after doubting ability to pay
By Clare Jim
Having made three 11th-hour coupon payments in the past two months, Evergrande again faces the end of a 30-day grace period on Monday, with dues totalling $82.5 million.
But a statement on Friday saying creditors had demanded $260 million and that it could not guarantee funds for coupon repayment prompted authorities to summon its chairman - and wiped a fifth off its stock's value on Monday. read more
Evergrande, once China's top-selling developer, is grappling with over $300 billion in liabilities, meaning a disorderly collapse could ripple through the property sector and beyond.
Its Friday statement was followed by one from authorities in its home province of Guangdong, saying they would send a team at Evergrande's request to oversee risk management, strengthen internal control and maintain operations - the state's first public move to intervene directly to manage any fallout.
The central bank, banking and insurance regulator and securities regulator also released statements, saying risk to the property sector could be contained.
Analysts said authorities' concerted effort signalled Evergrande has likely already entered a managed debt-asset restructuring process.
Morgan Stanley said such a process would involve coordination between authorities to maintain operations of property projects, and negotiation with onshore creditors to ensure financing for project completion.
Regulators would also likely facilitate debt restructuring discussion with offshore creditors after operations stabilise, the U.S. investment bank said in a report.
After the flurry of statements, Evergrande's stock nose-dived 20% on Monday to close at an all-time low of HK$1.82.
Its November 2022 bond - one of two bonds that could go into default upon Monday non-payment - was trading at the distressed price of 18.560 U.S. cents on the dollar, compared with 20.083 cents at Friday close.
LIQUIDITY SQUEEZE
Evergrande has been struggling to raise capital through asset disposal, and the government has asked Chairman Hui Ka Yan to use his wealth to repay company debt. read more
The firm is just one of a number of developers starved of liquidity due to regulatory curbs on borrowing, prompting offshore debt defaults, credit-rating downgrades and sell-offs in developers' shares and bonds.
To stem turmoil, regulators since October have urged banks to relax lending for developers' normal financing needs and allowed more real estate firms to sell domestic bonds. read more
To free up funds, Premier Li Keqiang on Friday said China will cut the bank reserve requirement ratio "in a timely way". read more
Still, the government may have to significantly step up policy-easing measures in the spring to prevent a sharp downturn in the property sector as repayment pressure intensifies, Japanese investment bank Nomura said in a report on Sunday.
Quarterly dollar bond repayments will almost double to $19.8 billion in the first quarter and $18.5 billion in the second.
Yet easing measures such as the ability to sell domestic bonds are unlikely to help Evergrande refinance as there would be no demand for its notes, CGS-CIMB Securities said on Monday.
Evergrande's inability to sell projects - with almost zero November sales - also makes short-term debt payments "highly unlikely", the brokerage said.
CONTAGION
On Monday, smaller developer Sunshine 100 China Holdings Ltd (2608.HK) said it had defaulted on a $170 million dollar bond due Dec. 5 "owing to liquidity issues arising from the adverse impact of a number of factors including the macroeconomic environment and the real estate industry". read more
The delinquency will trigger cross-default provisions under certain other debt instruments, it said.
Last week, Kaisa Group Holdings Ltd (1638.HK) - China's largest offshore debtor among developers after Evergrande - said bondholders had rejected an offer to exchange its 6.5% offshore bonds due Dec. 7 , leaving it at risk of default.
The developer has begun talks with some of the bondholders to extend the deadline for the $400 million debt repayment, sources have told Reuters. read more
Smaller rival China Aoyuan Property Group Ltd (3883.HK) last week also said creditors have demanded repayment of $651.2 million due to a slew of credit-rating downgrades, and that it may be unable to pay due to a lack of liquidity. read more
Aoyuan Chairman Guo Zi Wen on Friday told executives at an internal meeting to have a "wartime mindset" to ensure operation and project delivery and to fund repayment, a person with direct knowledge of the matter told Reuters.
Such tasks will be priorities for the developer, which will leave bond repayment negotiation to professional institutions in Hong Kong, said the person, declining to be identified as the matter is private.
Aoyuan did not respond to a request for comment.
The developer's share price fell nearly 8% on Monday. Kaisa lost 3.8% whereas Sunshine 100 plunged 14%.
($1 = 6.3724 Chinese yuan renminbi)
December 6, 20213:49 AM ESTLast Updated an hour ago
China
China Evergrande braces for debt deadline after doubting ability to pay
By Clare Jim
- Evergrande says no guarantee it can make $82.5 mln debt payments
- Says creditors have also demanded $260 mln repayment
- Authorities summon chairman; shares drop 20% to all-time low
- Disorderly collapse could ripple through property sector
Having made three 11th-hour coupon payments in the past two months, Evergrande again faces the end of a 30-day grace period on Monday, with dues totalling $82.5 million.
But a statement on Friday saying creditors had demanded $260 million and that it could not guarantee funds for coupon repayment prompted authorities to summon its chairman - and wiped a fifth off its stock's value on Monday. read more
Evergrande, once China's top-selling developer, is grappling with over $300 billion in liabilities, meaning a disorderly collapse could ripple through the property sector and beyond.
Its Friday statement was followed by one from authorities in its home province of Guangdong, saying they would send a team at Evergrande's request to oversee risk management, strengthen internal control and maintain operations - the state's first public move to intervene directly to manage any fallout.
The central bank, banking and insurance regulator and securities regulator also released statements, saying risk to the property sector could be contained.
Analysts said authorities' concerted effort signalled Evergrande has likely already entered a managed debt-asset restructuring process.
Morgan Stanley said such a process would involve coordination between authorities to maintain operations of property projects, and negotiation with onshore creditors to ensure financing for project completion.
Regulators would also likely facilitate debt restructuring discussion with offshore creditors after operations stabilise, the U.S. investment bank said in a report.
After the flurry of statements, Evergrande's stock nose-dived 20% on Monday to close at an all-time low of HK$1.82.
Its November 2022 bond - one of two bonds that could go into default upon Monday non-payment - was trading at the distressed price of 18.560 U.S. cents on the dollar, compared with 20.083 cents at Friday close.
LIQUIDITY SQUEEZE
Evergrande has been struggling to raise capital through asset disposal, and the government has asked Chairman Hui Ka Yan to use his wealth to repay company debt. read more
The firm is just one of a number of developers starved of liquidity due to regulatory curbs on borrowing, prompting offshore debt defaults, credit-rating downgrades and sell-offs in developers' shares and bonds.
To stem turmoil, regulators since October have urged banks to relax lending for developers' normal financing needs and allowed more real estate firms to sell domestic bonds. read more
To free up funds, Premier Li Keqiang on Friday said China will cut the bank reserve requirement ratio "in a timely way". read more
Still, the government may have to significantly step up policy-easing measures in the spring to prevent a sharp downturn in the property sector as repayment pressure intensifies, Japanese investment bank Nomura said in a report on Sunday.
Quarterly dollar bond repayments will almost double to $19.8 billion in the first quarter and $18.5 billion in the second.
Yet easing measures such as the ability to sell domestic bonds are unlikely to help Evergrande refinance as there would be no demand for its notes, CGS-CIMB Securities said on Monday.
Evergrande's inability to sell projects - with almost zero November sales - also makes short-term debt payments "highly unlikely", the brokerage said.
CONTAGION
On Monday, smaller developer Sunshine 100 China Holdings Ltd (2608.HK) said it had defaulted on a $170 million dollar bond due Dec. 5 "owing to liquidity issues arising from the adverse impact of a number of factors including the macroeconomic environment and the real estate industry". read more
The delinquency will trigger cross-default provisions under certain other debt instruments, it said.
Last week, Kaisa Group Holdings Ltd (1638.HK) - China's largest offshore debtor among developers after Evergrande - said bondholders had rejected an offer to exchange its 6.5% offshore bonds due Dec. 7 , leaving it at risk of default.
The developer has begun talks with some of the bondholders to extend the deadline for the $400 million debt repayment, sources have told Reuters. read more
Smaller rival China Aoyuan Property Group Ltd (3883.HK) last week also said creditors have demanded repayment of $651.2 million due to a slew of credit-rating downgrades, and that it may be unable to pay due to a lack of liquidity. read more
Aoyuan Chairman Guo Zi Wen on Friday told executives at an internal meeting to have a "wartime mindset" to ensure operation and project delivery and to fund repayment, a person with direct knowledge of the matter told Reuters.
Such tasks will be priorities for the developer, which will leave bond repayment negotiation to professional institutions in Hong Kong, said the person, declining to be identified as the matter is private.
Aoyuan did not respond to a request for comment.
The developer's share price fell nearly 8% on Monday. Kaisa lost 3.8% whereas Sunshine 100 plunged 14%.
($1 = 6.3724 Chinese yuan renminbi)
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https://www.occ.gov/publications-an...files/pub-derivatives-quarterly-qtr2-2021.pdf
Quarterly Report on Bank Trading and Derivatives Activities | OCC
Code:
Banks Ranked by Derivatives
The following is a ranking of all banks in the United States in terms of "Derivatives". This comparison is based on data reported on 2021-06-30.
Rank Derivatives Bank Name
1 $53,965,238,000,000 JPMorgan Chase Bank
2 $48,335,747,000,000 Goldman Sachs Bank USA
3 $43,728,143,000,000 Citibank
4 $19,001,395,000,000 Bank of America
5 $10,302,021,000,000 Wells Fargo Bank
6 $2,788,039,000,000 State Street Bank and Trust Company
7 $1,632,294,606,000 HSBC Bank USA
8 $1,160,063,000,000 The Bank of New York Mellon
9 $707,189,920,000 U.S. Bank
10 $504,466,067,000 Western Alliance Bank
11 $479,462,934,000 PNC Bank
12 $333,357,744,000 The Northern Trust Company
13 $312,127,000,000 Truist Bank
14 $294,405,094,000 TD Bank
15 $211,083,171,000 Citizens Bank
16 $170,162,996,000 MUFG Union Bank
17 $167,761,899,000 Capital One
18 $153,917,951,000 Fifth Third Bank
19 $131,797,865,000 BOKF
20 $128,373,000,000 Regions Bank
21 $127,525,711,000 KeyBank
22 $112,612,000,000 Morgan Stanley Bank
23 $77,117,094,000 The Huntington National Bank
24 $73,865,130,000 Manufacturers and Traders Trust Company
25 $54,216,021,000 Santander Bank, N.A.
26 $47,077,710,000 Capital One Bank (USA)
27 $43,928,148,000 First Horizon Bank
28 $41,165,000,000 Comerica Bank
29 $40,478,412,000 BBVA USA
30 $40,260,869,000 Silicon Valley Bank
31 $34,272,172,000 BMO Harris Bank
32 $29,209,200,000 UBS Bank USA
33 $25,939,322,000 Flagstar Bank, FSB
34 $23,707,016,000 East West Bank
35 $21,992,939,000 CIT Bank
36 $20,882,208,000 South State Bank
37 $20,350,427,000 Bank of the West
38 $20,052,989,000 People's United Bank
39 $19,889,352,000 City National Bank
40 $19,058,173,000 Zions Bancorporation, N.A.
41 $18,597,199,000 E*TRADE Bank
42 $18,159,000,000 Ally Bank
43 $16,843,069,000 First Financial Bank
44 $15,370,000,000 Deutsche Bank Trust Company Americas
45 $13,851,101,000 Pacific Coast Bankers' Bank
46 $13,130,368,000 Lake Forest Bank & Trust Company
47 $12,863,932,000 Synovus Bank
48 $12,767,986,000 First National Bank of Pennsylvania
49 $12,308,568,000 Valley National Bank
50 $12,266,000,000 Barclays Bank Delaware
51 $11,577,591,000 Discover Bank
52 $10,426,712,000 Webster Bank
53 $9,843,798,000 Associated Bank
54 $9,579,842,000 Fulton Bank
55 $8,824,014,000 Hancock Whitney Bank
56 $8,438,133,000 MidFirst Bank
57 $8,412,000,000 Morgan Stanley Private Bank
58 $8,038,243,000 Umpqua Bank
59 $7,322,595,000 Sallie Mae Bank
60 $7,018,004,000 Israel Discount Bank of New York
61 $6,745,769,000 Old National Bank
62 $6,580,592,000 PlainsCapital Bank
63 $6,126,508,000 BankUnited
64 $5,903,625,000 TIAA, FSB
65 $5,605,163,000 USAA Federal Savings Bank
66 $5,532,473,000 Sterling National Bank
67 $5,422,540,000 CIBC Bank USA
68 $5,362,957,000 First Midwest Bank
69 $5,353,786,000 Arvest Bank
70 $5,282,706,000 Signature Bank
71 $5,269,838,000 Atlantic Union Bank
72 $5,225,682,000 Wintrust Bank
73 $5,112,159,000 First Republic Bank
74 $5,087,969,000 Safra National Bank of New York
75 $4,987,697,000 Investors Bank
pawdalaw
Superstar
I also read at least 4 different other developers who are either delisted or on the verge of default.
that ripple effect.
Yahoo is part of the Yahoo family of brands
China’s Liquidity Moves Won’t Save Weaker Developers, S&P Says
Tassia Sipahutar
Tue, December 7, 2021, 2:38 AM
(Bloomberg) -- More Chinese developers are at risk of defaulting due to a liquidity crunch despite recent measures by the authorities to free up some funds, according to S&P Global Ratings.
The cut in the reserve requirement ratio won’t be enough to save some property developers with ratings of single B and below from default, Esther Liu, a director at S&P, said in a briefing on Tuesday. These borrowers were already exposed to funding pains as investors turned more selective amid the risks of contagion from the China Evergrande Group situation, she said.
READ MORE: Missing Coupon Payments; Kaisa Deferral Offer: Evergrande Update
“We expect more debt restructurings, more exchange offers that we might identify as distressed exchanges because they are less than the original promise,” Liu said during an online webinar.
The People’s Bank of China said on Monday it will reduce most banks’ reserve requirement ratios by 0.5 percentage point next week, releasing 1.2 trillion yuan ($188 billion) of liquidity. That came as the Chinese government seeks to extend support to the economy, whose growth is threatened by a slide in the property market.
S&P expects the downturn to persist on the back of credit tightening and restrictive policies in the sector, potentially leading to a 10% decline in nationwide residential sales next year and an additional 5%-10% drop in 2023. In the worst-case scenario it expects a third of its rated Chinese developers to continue having liquidity problems over the next six to 12 months.
China’s Liquidity Moves Won’t Save Weaker Developers, S&P Says
Tassia Sipahutar
Tue, December 7, 2021, 2:38 AM
(Bloomberg) -- More Chinese developers are at risk of defaulting due to a liquidity crunch despite recent measures by the authorities to free up some funds, according to S&P Global Ratings.
The cut in the reserve requirement ratio won’t be enough to save some property developers with ratings of single B and below from default, Esther Liu, a director at S&P, said in a briefing on Tuesday. These borrowers were already exposed to funding pains as investors turned more selective amid the risks of contagion from the China Evergrande Group situation, she said.
READ MORE: Missing Coupon Payments; Kaisa Deferral Offer: Evergrande Update
“We expect more debt restructurings, more exchange offers that we might identify as distressed exchanges because they are less than the original promise,” Liu said during an online webinar.
The People’s Bank of China said on Monday it will reduce most banks’ reserve requirement ratios by 0.5 percentage point next week, releasing 1.2 trillion yuan ($188 billion) of liquidity. That came as the Chinese government seeks to extend support to the economy, whose growth is threatened by a slide in the property market.
S&P expects the downturn to persist on the back of credit tightening and restrictive policies in the sector, potentially leading to a 10% decline in nationwide residential sales next year and an additional 5%-10% drop in 2023. In the worst-case scenario it expects a third of its rated Chinese developers to continue having liquidity problems over the next six to 12 months.
Yahoo is part of the Yahoo family of brands
Evergrande’s Epic Restructuring Puts Onus on Xi to Limit Fallout
Bloomberg News
Tue, December 7, 2021, 5:08 AM·8 min read
Evergrande’s Epic Restructuring Puts Onus on Xi to Limit Fallout
Bloomberg News
Tue, December 7, 2021, 5:08 AM·8 min read
(Bloomberg) -- The question has loomed over China Evergrande Group for months: Is the world’s most indebted developer too big to fail?
Investors finally have their answer. With a flurry of announcements that sent Evergrande bonds tumbling to record lows this week, the company and Beijing have made it clear that billionaire Hui Ka Han’s property giant is headed for one of China’s largest-ever debt restructurings.
Barring a last-minute shock, holders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
While ratings companies have yet to declare an official default, holders of two bonds issued by an Evergrande unit hadn’t received overdue coupon payments by the end of a 30-day grace period on Monday. S&P Global Ratings said on Tuesday that a default by the developer was “inevitable.” Evergrande didn’t immediately respond to a request for comment.
Read more: Evergrande Bondholders Yet to Be Paid as Grace Period Ends
The developments mark the beginning of the end for the sprawling real estate empire started 25 years ago by Hui, setting off a lengthy battle over who gets paid from what remains. Evergrande said in a brief exchange filing on Friday that it plans to “actively engage” with offshore creditors on a restructuring plan. The company is planning to include all its offshore public bonds and private debt obligations in the restructuring, people familiar with the matter said Monday.
Evergrande, which disclosed more than $300 billion of total liabilities as of June, becomes the biggest victim of President Xi Jinping’s efforts to crack down on the free-wheeling real estate sector and curb property speculation. Beijing’s reluctance to bail out the developer sends a clear signal that the Communist Party won’t tolerate massive debt build-ups that threaten financial stability.
The question now is whether the government can limit the fallout. Already, the stocks and bonds of smaller, lower-rated real estate firms have plunged. At least 10 have defaulted on onshore or offshore bonds since concerns about Evergrande’s financial health intensified in June. Kaisa Group Holdings Ltd., a major issuer of dollar bonds, has also been pushed to the brink in recent days. Junk dollar bond yields have soared above 20%, making it prohibitively expensive for cash-strapped firms to borrow offshore. Home sales and prices have cratered, adding another headwind for an economy grappling with sluggish growth.
“They’re playing with fire,” said Cathie Wood, the head of Ark Investment Management, which pared its China holdings earlier this year.
For now, Chinese authorities are signaling that they plan to ring-fence Evergrande and limit contagion rather than orchestrate a rescue as they’ve done during past crises.
The People’s Bank of China reiterated on Friday that risks posed to the economy by Evergrande’s debt crisis can be contained, citing the developer’s “own poor management” and “reckless expansion” for the problems it faces. The China Banking and Insurance Regulatory Commission said in a separate statement that loans for real estate development and acquisitions should be issued in a “reasonable” manner.
The latest financial system support measures came on Monday, with China’s central bank releasing about 1.2 trillion yuan ($188 billion) of liquidity via a cut in the reserve requirement ratio for most banks. The government pledged to support the housing market to better meet “reasonable” needs, adding to signs it will ease real estate curbs.
Officials are also stepping in to help Evergrande run its business. Chairman Hui was summoned by the Guangdong government last week after the company said it plans to work with creditors on a restructuring plan. Authorities in Evergrande’s home province will send a working group to urge the builder to manage risks, as well as strengthen internal controls and ensure normal operations, according to a Dec. 3 statement.
Evergrande’s Epic Restructuring Puts Onus on Xi to Limit Fallout
Bloomberg News
Tue, December 7, 2021, 5:08 AM·8 min read
Evergrande’s Epic Restructuring Puts Onus on Xi to Limit Fallout
Bloomberg News
Tue, December 7, 2021, 5:08 AM·8 min read
(Bloomberg) -- The question has loomed over China Evergrande Group for months: Is the world’s most indebted developer too big to fail?
Investors finally have their answer. With a flurry of announcements that sent Evergrande bonds tumbling to record lows this week, the company and Beijing have made it clear that billionaire Hui Ka Han’s property giant is headed for one of China’s largest-ever debt restructurings.
Barring a last-minute shock, holders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
While ratings companies have yet to declare an official default, holders of two bonds issued by an Evergrande unit hadn’t received overdue coupon payments by the end of a 30-day grace period on Monday. S&P Global Ratings said on Tuesday that a default by the developer was “inevitable.” Evergrande didn’t immediately respond to a request for comment.
Read more: Evergrande Bondholders Yet to Be Paid as Grace Period Ends
The developments mark the beginning of the end for the sprawling real estate empire started 25 years ago by Hui, setting off a lengthy battle over who gets paid from what remains. Evergrande said in a brief exchange filing on Friday that it plans to “actively engage” with offshore creditors on a restructuring plan. The company is planning to include all its offshore public bonds and private debt obligations in the restructuring, people familiar with the matter said Monday.
Evergrande, which disclosed more than $300 billion of total liabilities as of June, becomes the biggest victim of President Xi Jinping’s efforts to crack down on the free-wheeling real estate sector and curb property speculation. Beijing’s reluctance to bail out the developer sends a clear signal that the Communist Party won’t tolerate massive debt build-ups that threaten financial stability.
The question now is whether the government can limit the fallout. Already, the stocks and bonds of smaller, lower-rated real estate firms have plunged. At least 10 have defaulted on onshore or offshore bonds since concerns about Evergrande’s financial health intensified in June. Kaisa Group Holdings Ltd., a major issuer of dollar bonds, has also been pushed to the brink in recent days. Junk dollar bond yields have soared above 20%, making it prohibitively expensive for cash-strapped firms to borrow offshore. Home sales and prices have cratered, adding another headwind for an economy grappling with sluggish growth.
“They’re playing with fire,” said Cathie Wood, the head of Ark Investment Management, which pared its China holdings earlier this year.
For now, Chinese authorities are signaling that they plan to ring-fence Evergrande and limit contagion rather than orchestrate a rescue as they’ve done during past crises.
The People’s Bank of China reiterated on Friday that risks posed to the economy by Evergrande’s debt crisis can be contained, citing the developer’s “own poor management” and “reckless expansion” for the problems it faces. The China Banking and Insurance Regulatory Commission said in a separate statement that loans for real estate development and acquisitions should be issued in a “reasonable” manner.
The latest financial system support measures came on Monday, with China’s central bank releasing about 1.2 trillion yuan ($188 billion) of liquidity via a cut in the reserve requirement ratio for most banks. The government pledged to support the housing market to better meet “reasonable” needs, adding to signs it will ease real estate curbs.
Officials are also stepping in to help Evergrande run its business. Chairman Hui was summoned by the Guangdong government last week after the company said it plans to work with creditors on a restructuring plan. Authorities in Evergrande’s home province will send a working group to urge the builder to manage risks, as well as strengthen internal controls and ensure normal operations, according to a Dec. 3 statement.
(continued)
So far, containment efforts haven’t assuaged investors. While pain has so far largely been contained to China’s smaller offshore credit market, that’s little consolation for developers that have relied heavily on international investors to raise funds. Borrowing costs have spiked for companies with the weakest balance sheets, including Kaisa and Fantasia Holdings Group Co.
In all, Chinese borrowers have defaulted on a record $10.2 billion of offshore bonds this year, with real estate firms making up 36% of that total, according to data compiled by Bloomberg.
“There is extreme stress in the market,” with about half the developers in the country in deep financial distress and pricing in high default risk, said Jenny Zeng, co-head of Asia Pacific fixed-income at Alliance Bernstein.
Still, China’s bigger, higher-rated developers such as Longfor Group Holdings Ltd. and Country Garden Holdings Co. are holding up much better than their lower-rated rivals. Country Garden, the largest developer by sales, has seen its 2031 bond rebound to 88 cents on the dollar, after dropping to 73 cents last month. A 2024 note sold by China Vanke Co., the second-biggest firm, has rallied to trade above par.
“We expect sector divergence to continue,” said Iris Chen, a credit desk analyst at Nomura Securities Co. “The high-quality survivors of the game will gain despite relatively high cash prices already, as they will have a better chance to restart normal refinancing, which will further strengthen their liquidity.”
China is also trying to limit the fallout on the broader housing market, in a country where real estate accounts for about a quarter of economic output and as much as 75% of household wealth. China’s housing slump has intensified in recent months after sales plunged and home prices fell for the first time in six years. Contract sales by the country’s top 100 developers plunged 38% in November from a year earlier to 751 billion yuan, sharper than the 32% drop in the previous month, according to preliminary data from China Real Estate Information Corp.
Any slowdown in real estate could have a ripple effect not only on China’s economy but on global growth. China’s growth slowed in the third quarter, with signs there will be more pain to come. The Federal Reserve last month warned that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorates dramatically. China’s real estate sector makes up almost half of the world’s distressed dollar-denominated debt.
“Think about the cyclical risk out there if we lose China,” Ark Investment’s Wood said at a recent Milken Global Conference. “At the margin, China has been responsible for a tremendous amount of cyclical growth.”
China’s government isn’t standing pat. President Xi oversaw a meeting of the Communist Party’s Politburo on Monday that concluded with a signal of an easing in curbs on real estate. The leadership panel, gathering in advance of a broader annual economic session that sets goals for the coming year, pledged to stabilize the economy in 2022.
For global bondholders, an Evergrande default is likely to start a prolonged battle for repayment. Chinese authorities have made it clear the company should put homebuyers, suppliers, and retail investors -- who bought the firm’s wealth management products -- ahead of debtholders. Some 1.6 million homebuyers have put down deposits with Evergrande for properties that have yet to be completed.
“No matter what the outcome, offshore bondholders are last in line for payment and are certainly going to have to accept haircuts, possibly significant ones,” said Andrew Collier, managing director of Orient Capital Research Inc. in Hong Kong.
With Evergrande’s dollar notes trading at about 20 cents on the dollar, the market is already pricing in a haircut of around 80%. The key for bondholders is whether the company can speed up home sales and unload assets to raise cash so it can start settling its liabilities, said Gary Ng, a senior economist at Natixis SA.
Evergrande’s offshore noteholders included Ashmore Group Plc and UBS AG, according to data compiled by Bloomberg. Even as Evergrande’s stock and bond prices have plunged, Ashmore bought another $100 million of bonds issued by the developer or its subsidiaries in the third quarter. The trades brought its holdings to more than $500 million at the end of September, the data show.
Further market reaction to Evergrande’s missed payments may be driven by how the restructuring process plays out, said Jim Veneau, head of Asian fixed income at AXA SA.
“An orderly restructuring, where the company can run its operations as normally as possible and refrain from distressed asset sales will substantially help contain further damage across the sector,” Veneau said.
The single biggest loser in dollar terms may be Evergrande founder Hui, who once owned more than 70% of the company before recent stock sales. The plunge in Evergrande’s share price this year has cut the chairman’s wealth by 73%, or about $17 billion, according to the Bloomberg Billionaires Index. Once the second-richest man in China, Hui now ranks 75th.
For years, the son of an impoverished wood cutter who built one of China’s biggest real estate firms and later branched out into electric vehicles, tourism and soccer clubs, has been able to count on the support of Beijing, or other tyc00ns to bail him out. This time, he appears on his own.
So far, containment efforts haven’t assuaged investors. While pain has so far largely been contained to China’s smaller offshore credit market, that’s little consolation for developers that have relied heavily on international investors to raise funds. Borrowing costs have spiked for companies with the weakest balance sheets, including Kaisa and Fantasia Holdings Group Co.
In all, Chinese borrowers have defaulted on a record $10.2 billion of offshore bonds this year, with real estate firms making up 36% of that total, according to data compiled by Bloomberg.
“There is extreme stress in the market,” with about half the developers in the country in deep financial distress and pricing in high default risk, said Jenny Zeng, co-head of Asia Pacific fixed-income at Alliance Bernstein.
Still, China’s bigger, higher-rated developers such as Longfor Group Holdings Ltd. and Country Garden Holdings Co. are holding up much better than their lower-rated rivals. Country Garden, the largest developer by sales, has seen its 2031 bond rebound to 88 cents on the dollar, after dropping to 73 cents last month. A 2024 note sold by China Vanke Co., the second-biggest firm, has rallied to trade above par.
“We expect sector divergence to continue,” said Iris Chen, a credit desk analyst at Nomura Securities Co. “The high-quality survivors of the game will gain despite relatively high cash prices already, as they will have a better chance to restart normal refinancing, which will further strengthen their liquidity.”
China is also trying to limit the fallout on the broader housing market, in a country where real estate accounts for about a quarter of economic output and as much as 75% of household wealth. China’s housing slump has intensified in recent months after sales plunged and home prices fell for the first time in six years. Contract sales by the country’s top 100 developers plunged 38% in November from a year earlier to 751 billion yuan, sharper than the 32% drop in the previous month, according to preliminary data from China Real Estate Information Corp.
Any slowdown in real estate could have a ripple effect not only on China’s economy but on global growth. China’s growth slowed in the third quarter, with signs there will be more pain to come. The Federal Reserve last month warned that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorates dramatically. China’s real estate sector makes up almost half of the world’s distressed dollar-denominated debt.
“Think about the cyclical risk out there if we lose China,” Ark Investment’s Wood said at a recent Milken Global Conference. “At the margin, China has been responsible for a tremendous amount of cyclical growth.”
China’s government isn’t standing pat. President Xi oversaw a meeting of the Communist Party’s Politburo on Monday that concluded with a signal of an easing in curbs on real estate. The leadership panel, gathering in advance of a broader annual economic session that sets goals for the coming year, pledged to stabilize the economy in 2022.
For global bondholders, an Evergrande default is likely to start a prolonged battle for repayment. Chinese authorities have made it clear the company should put homebuyers, suppliers, and retail investors -- who bought the firm’s wealth management products -- ahead of debtholders. Some 1.6 million homebuyers have put down deposits with Evergrande for properties that have yet to be completed.
“No matter what the outcome, offshore bondholders are last in line for payment and are certainly going to have to accept haircuts, possibly significant ones,” said Andrew Collier, managing director of Orient Capital Research Inc. in Hong Kong.
With Evergrande’s dollar notes trading at about 20 cents on the dollar, the market is already pricing in a haircut of around 80%. The key for bondholders is whether the company can speed up home sales and unload assets to raise cash so it can start settling its liabilities, said Gary Ng, a senior economist at Natixis SA.
Evergrande’s offshore noteholders included Ashmore Group Plc and UBS AG, according to data compiled by Bloomberg. Even as Evergrande’s stock and bond prices have plunged, Ashmore bought another $100 million of bonds issued by the developer or its subsidiaries in the third quarter. The trades brought its holdings to more than $500 million at the end of September, the data show.
Further market reaction to Evergrande’s missed payments may be driven by how the restructuring process plays out, said Jim Veneau, head of Asian fixed income at AXA SA.
“An orderly restructuring, where the company can run its operations as normally as possible and refrain from distressed asset sales will substantially help contain further damage across the sector,” Veneau said.
The single biggest loser in dollar terms may be Evergrande founder Hui, who once owned more than 70% of the company before recent stock sales. The plunge in Evergrande’s share price this year has cut the chairman’s wealth by 73%, or about $17 billion, according to the Bloomberg Billionaires Index. Once the second-richest man in China, Hui now ranks 75th.
For years, the son of an impoverished wood cutter who built one of China’s biggest real estate firms and later branched out into electric vehicles, tourism and soccer clubs, has been able to count on the support of Beijing, or other tyc00ns to bail him out. This time, he appears on his own.