Evergrande again nears default as China moves to reassure markets

China Evergrande Group shares slumped to a record low on Monday as authorities intervened to reassure markets after the heavily-indebted property developer warned on a coupon payment, pushing it closer to default.

China’s central bank said it would cut reserve requirements for banks while the politburo vowed to promote healthy development of the property sector, reinforcing previous messages to investors that Evergrande’s woes could be contained.

Having made three 11th-hour coupon payments in the past two months, Evergrande again on Monday faced the end of a 30-day grace period, with dues totalling $82.5 million.

Its shares tumbled by 20% following a statement on Friday that said creditors had demanded $260 million and that it could not guarantee funds for coupon repayment, prompting authorities to summon its chairman.

As at the end of Asia business hours, two bondholders said they had yet to receive payments from Evergrande. Evergrande declined to comment.

Once China’s top-selling developer, Evergrande is grappling with over $300 billion in liabilities, meaning a disorderly collapse could ripple through the property sector and beyond.

AUTHORITIES ACT

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$1.81.

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.

“Evergrande’s been trying to sell assets to repay debt, but Friday statement basically says it is going to ‘surrender’ and need help,” said Conita Hung, investment strategy director at Tiger Faith Asset Management. “This sends a very bad signal.”

She said given the large size of its debt, Evergrande’s problems will take years to solve even with state intervention.

LIQUIDITY SQUEEZE

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.

To free up funds, Premier Li Keqiang on Friday said China will cut the bank reserve requirement ratio “in a timely way”.

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 pressures intensify, 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.

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 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”.

The delinquency will trigger cross-default provisions under certain other debt instruments, it said.

Last week, Kaisa Group Holdings Ltd, 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.

Smaller rival China Aoyuan Property Group Ltd 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.

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 repayments, 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 2.2% and Sunshine 100 plunged 14%.

($1 = 6.3724 Chinese yuan renminbi)

 

(Reporting by Clare Jim in Hong Kong; Additional reporting to Shuyan Wang in Beijing; editing by Anne Marie Roantree and Jason Neely)

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