Evergrande Bond Selloff Deepens on Court Concern, Downgrades

(Bloomberg) -- China Evergrande Group bonds dropped to record lows after reports that creditor lawsuits against the world’s most indebted developer will be consolidated, a step that has preceded several high-profile defaults by Chinese borrowers.

Cases related to Evergrande and its affiliates will be centralized in a Guangzhou court, Caixin reported, citing two unnamed lawyers. Speculation about the move triggered a slump in the developer’s bonds late Thursday, with losses deepening after the city of Beijing tightened property curbs and S&P Global Ratings cut its assessment of Evergrande for the second time in as many weeks.

“Evergrande’s liquidity position is eroding more quickly and by more than we previously expected,” S&P analysts led by Matthew Chow wrote in a report late Thursday in Hong Kong. “The company’s nonpayment risk is escalating, not only for the substantial public bond maturities in 2022 but also for its bank and trust loans and other debt liabilities over the next 12 months.”

The rating firm downgraded Evergrande by two levels to CCC, just four notches above the designation for defaulted borrowers. The developer, which has been making its dollar bond payments on time even as some units fall behind on payments to suppliers, didn’t respond to a request for comment.

While Evergrande has been offloading assets and listing units in an attempt to stave off a cash crunch, some creditors are losing confidence in its ability to repay a $300 billion mountain of liabilities. Any default could send shockwaves through the financial system, roiling banks, trust companies, the bond market and Chinese homeowners. Policy makers in Beijing have so far remained silent about the possibility of supporting Evergrande, leaving investors to guess at whether Xi Jinping’s government views the company as too big to fail.

Moves to centralize judicial cases have preceded several big Chinese defaults, including at HNA Group Co., Peking University Founder Group and China Fortune Land Development, according to the Caixin report.

Evergrande’s local and offshore bonds continued to slide Friday, with an onshore note due in 2023 falling 7.7% to a record low of 57.5 yuan. Shares dropped 4.6%, extending this year’s decline to 65%.

The developer’s woes have also weighed on China’s riskier dollar bonds, helping send yields on junk-rated debt to their highest level relative to investment-grade notes since March 2020, according to Bloomberg Barclays indexes.

S&P noted that disputes over contract payments at Evergrande are rising as contractors claim the company has delayed payments. These contractors are applying for asset freezes as they aim to resolve disputes in court, contributing to negative media reports and lenders’ risk adjustments, S&P said.

“The steadily increasing number of asset freezes signals strained liquidity,” S&P said. “Evergrande’s access to funding from financial institutions is more significantly constrained than expected. As news reports continue to be negative, the company could experience a considerable ‘downward spiral,’ with lenders potentially further tightening their risk exposure to the company.”

The disputes and tightened liquidity come as huge liabilities loom. S&P estimates the developer has more than 240 billion yuan ($37 billion) of bills and trade payables to settle over the next 12 months, of which about 100 billion yuan is due this year.

Evergrande is ramping up asset sales to pare debt, raising more than $8 billion already this year. The company’s shares and bonds rose earlier this week after it announced a stake sale in its internet unit for $418 million.

China’s escalating property curbs may add pressure on Evergrande’s sales. Beijing plugged a loophole in home-buying late Thursday, saying divorcees cannot purchase additional homes for three years if the number of properties they held while married exceed the permitted quota.

“Evergrande is just moving into a vicious cycle,” said Eddie Chia, portfolio manager at China Life Franklin. “It is suffering from negative feedback loop of negative news.”

©2021 Bloomberg L.P.

With assistance from Bloomberg