Evergrande to Include All Offshore Bonds in Restructuring
China Evergrande Group is planning to include all its offshore public bonds and private debt obligations in a restructuring.
(Bloomberg) -- China Evergrande Group is planning to include all its offshore public bonds and private debt obligations in a restructuring that may rank among the nation’s biggest ever, according to people familiar with the matter.
The plan would cover public bonds sold by Evergrande and unit Scenery Journey Ltd., said the people, who asked not to be identified discussing private information. It would also include about $260 million of notes issued by joint venture Jumbo Fortune Enterprises that Evergrande has guaranteed, one of the people said. The formal restructuring process has yet to begin and details of the plan could change.
While Evergrande formally acknowledged the need to restructure its offshore debt for the first time on Friday, the developer’s brief exchange filing left investors guessing at whether the overhaul would encompass its entire complex web of international obligations. Evergrande has some $19.2 billion in outstanding offshore public bonds and $8.4 billion in local notes, Bloomberg-compiled data show.
Speculation over Evergrande’s fate has roiled Chinese credit markets for months, stoking fears of financial contagion and prompting Xi Jinping’s government to take a series of steps to contain the fallout on Asia’s largest economy. The latest support measures came on Monday, with China’s central bank releasing about 1.2 trillion yuan ($188 billion) of liquidity into the financial system via a cut in the reserve requirement ratio for most banks. The government also added to signs it will ease real estate curbs, pledging to support the housing market to better meet “reasonable” needs.
Grace periods for interest payments on two notes from Evergrande’s Scenery Journey unit end Monday and could mark the developer’s first default on public debts. Evergrande indicated in its filing Friday that it may not be able to fulfill its pledge to guarantee payment on the notes issued by Jumbo Fortune. The developer didn’t immediately respond to a request for comment on its restructuring plan Monday.
Evergrande sits at the epicenter of a broader crisis in Chinese property debt that was sparked by a government clampdown on excessive borrowing and real estate speculation. Chinese borrowers have defaulted on a record $10.2 billion of offshore bonds in 2021, with real estate firms making up 36% of that total, according to data compiled by Bloomberg. That has pushed yields on an index of Chinese junk bonds, many of which come from property firms, to near record highs above 22%.
Evergrande’s dollar bond due March 2022 was poised for its biggest fall on record Monday, dropping 11.2 cents on the dollar to 22.4 cents. Shares plunged 20% to an all-time low.
A barrage of statements from Chinese regulators -- several of which landed just minutes after Evergrande’s announcement on Friday -- suggested authorities are striving to contain the fallout on homeowners, the financial system and the broader economy rather than orchestrate a bailout.
The government of Guangdong, the southern province where Evergrande is based, summoned founder Hui Ka Yan to express concern over the company’s announcement and said it would dispatch a team to the developer to ensure “normal” operations. The People’s Bank of China blamed Evergrande’s problems on the company’s “own poor management” and “reckless expansion.”
Evergrande has been reviewing its capital structure and has engaged in “ongoing dialogue with offshore creditors” since September, according to its filing on Friday.
The next step is for Evergrande advisors to initiate meetings with bondholders’ representatives, people familiar with the matter said.
The flurry of activity follows several weeks of relative calm for Evergrande, which has been making last-minute payments on its dollar notes since late October at the urging of Beijing. Friday’s statements signal the world’s most indebted developer may not make further payments within their grace periods, even after a spate of personal asset sales by Hui that appeared designed to help Evergrande meet its near-term debt obligations.
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The company’s next test comes later Monday. That’s when a 30-day grace period ends on the two Scenery Journey dollar bond interest payments that were initially due Nov. 6: a $41.9 million coupon for a note maturing in 2022 and $40.6 million of interest on a security due the following year.
Meanwhile, trust firms that have issued at least $5 billion in high-yield products linked to Evergrande are bracing for a cascade of losses. At least three firms -- including Citic Trust Co., China Foreign Economy and Trade Trust Co. and National Trust -- notified clients over the past few days that they risk missing payments on Evergrande products due to the developer’s strained finances, separate people familiar with the matter said.
The question for global markets is whether Beijing can coordinate a restructuring without upending the broader real estate sector, which accounts for nearly a quarter of economic output. Policy makers have a history of abandoning efforts to rein in developers when the risks to growth mount, though Xi appears more determined than his predecessors to stamp out the moral hazard that allowed companies like Evergrande to expand so rapidly.
While it will be important to monitor how Evergrande’s restructuring progresses, the odds of renewed panic in Chinese credit markets are low, according to analysts at China International Capital Corp., one of the nation’s largest investment banks. Real estate companies with poor management and high financial risks will be “phased out,” but authorities are likely to ensure that higher-quality developers retain access to funding, CICC analysts Yan Xu and Eric Yu Zhang wrote in a report.
Investors are increasingly differentiating between the weakest and strongest borrowers after China’s government took steps to mitigate the cash crunch for higher-rated developers in recent weeks. Apart from Evergrande, money managers are bracing for a potential default by Kaisa Group Holdings Ltd., which faces a $400 million bond maturity on Tuesday after failing to swap the notes for new ones due 18 months later.
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