On September 23 at midnight EST, Evergrande, the debt-ridden Chinese real estate giant, was due to have paid $ 83.5 million to foreign investors. The next morning, at least some of those investors had not been paid, according to Reuters and the Financial Time-a critical step which rekindled fears of the complete collapse of Evergrande.
Evergrande owed the $ 83.5 million in coupon payments on the dollar-denominated bonds it had sold to foreign investors, and the Chinese government had informed the company to avoid failure. The day before, the company announced that it had privately negotiated with Chinese bondholders a coupon payment of $ 36 million that was also due on September 23. But that day passed in total silence, without any statement from Evergrande on how it planned to meet its obligations to its foreign bondholders.
Has Evergrande defaulted?
The terms of the bonds, with a face value of nearly $ 2.03 billion, give Evergrande a 30-day grace period to make its payment. Thus, within the framework of this set of payments, Evergrande will be in default only if it cannot pay within the grace period.
But Thursday’s extended deadline is certainly not a sign of health recovery. Evergrande also missed payments to a municipal government in Anhui province, according to the Financial Times reported. And he has more deadlines to come. Evergrande still owes $ 47.5 million in coupon payments to foreign investors next week; in total, he is expected to shell out $ 669 million in coupon payments by the end of the year. And next year, Evergrande will have to repay $ 7.4 billion when a number of its bonds come due.
“We are a long way from solving the Evergrande payment problem,” Julian Evans-Pritchard, senior Chinese economist at Capital Economics, said in a webinar Thursday morning. “He is essentially facing a liquidity crisis. It may well be that it is so extensive that without some support it will end up failing in many of its obligations. “
What will the Chinese government do about Evergrande?
Due payments again beg the question: what will China’s next step be? Although the government has assembled a team of accountants and lawyers to review Evergrande’s books, it has yet to announce an impending restructuring of the company’s debt. And although China has also periodically injected money into the banking system, it has not said anything about bail out Evergrande.
The government will feel the greatest urgency to act only if Evergrande’s problems threaten to trigger a systemic crisis – the so-called “contagion” in the financial sector. In his webinar, Evans-Pritchard said the industry may well be able to absorb even a total collapse of Evergrande.
“If you look at offshore bonds, the major holders are all big global banks and asset holders” like UBS and HSBC, Evans-Pritchard said. In China, “Evergrande has taken out loans from about 20 commercial banks, and if you look at the three largest, their exposure to Evergrande is less than 3% of outstanding loans. There could be smaller regional banks that have made loans to Evergrande, he added. “We may not be aware of these, and these could be having issues.” But the government could act to save these banks, rather than saving Evergrande itself.
Protect Chinese banks from an Evergrande collapse
One of China’s top priorities will be to prevent the interbank system from collapsing – and the government’s particular advantage, over that of the United States during the 2008 crisis, is its absolute control over the banks. . “All the major players are state owned, so the government will likely step in to make sure there is plenty of cash in circulation,” Evans-Pritchard said.
As a result, the Chinese government can prevent the kind of sharp revaluation of counterparty risk that has occurred following the collapse of Lehman Brothers: banks are reluctant to lend to each other, or are willing to do so only at a high cost. “Even if there are concerns about counterparty risk, the government can step in and say, ‘Well, you just have to keep lending to each other. “