This story was first published on FinanceAsia.
Has China Evergrande Group, the world’s most indebted property developer, defaulted? Members of German market information provider, DMSA Deutsche Markt Screening Agentur, say the Chinese firm has.
Meanwhile, reports by several other media outlets, including Bloomberg and the Wall Street Journal, suggest that the company has so far managed to avert bankruptcy. They detail that some bond holders received payment on November 10, while others including Reuters, claim they remain waiting.
Evergrande owes US$300 billion of debt, including a US$148 coupon payment for offshore bonds which matured in October. However, the company was offered a 30-day extended grace period, until November 10.
“We have long known that Evergrande was playing with fire on the offshore front,” Alicia Garcia-Herrero, Asia Pacific chief economist of Natixis, told FinanceAsia.
She said that with $20 billion outstanding and not yet fulfilling coupon requirements, investors are “very nervous, especially since the nominal price of these bonds is severely hit.”
“Evergrande officially defaulted. DMSA is preparing bankruptcy proceedings against Evergrande Group,” said its company press release on November 10. It noted the company's decision to purchase some of Evergrande’s overdue bonds, to put itself in a position to file for bankruptcy against the developer as a creditor.
“We as DMSA have deliberately bought bonds from Evergrande, knowing full well that we are unlikely to get them back, in order to finally get transparency into this opaque news. Therefore, we will now take legal action against Evergrande and file for bankruptcy!” said Marco Metzler, a senior advisor and senior analyst of DMSA on his Linkedin account on November 13.
The bankruptcy proceedings will be a test for Hong Kong as an international offshore centre, said Garcia-Herrero. Evergrande is listed on the Hong Kong stock exchange and some of its offshore bonds are issued in this Asian financial hub.
Ducks in order
In the event of a default, offshore bond holders would have the lowest priority in getting any payment from the firm, said a Natixis report on October 11. Top of the pecking order would be Chinese households, followed by Evergrande’s suppliers, it explained.
Andre Wheeler, chief executive officer of Asia Pacific Connex, an Australian consultancy focusing on Asia Pacific businesses, echoed this sentiment. He explained, given that domestic debt accounts for 300 percent of GDP, the Chinese government simply cannot afford to experience a domestic economic collapse, “the (Chinese government’s) dilemma is how to let international lenders down softly as China needs international investment.”
Spooking the market
As the biggest issuer of US dollar offshore bonds among Chinese property developers, Evergrande’s fate is spooking the bond market. The average offshore bond yield for privately-owned high-yield Chinese property developers rose to 12.6 percent in October from 7.6 percent in August, detailed a Natixis report on November 4. This month in November, the Bloomberg US dollar Credit China High Yield Index rose by nearly 25 percent. It has since hovered around the 20 percent mark.
Significant turbulence in the offshore bond market is creating refinancing risk for Chinese property developers, noted a Moody’s report on October 29. Chinese developers rated by Moody’s issued US$300 million for most of October, a sharp drop from the US$4.2 billion issued in September, according to the report.
Even if Evergrande avoids default, the risk of a meltdown in China’s real estate sector exists, warned Garcia-Herrero. According to an estimate by BNP Paribas, the sector accounts for one-third of China’s domestic economy.
Global fears growing
The pursuit of action against Evergrande by Germany’s DMSA signals international concern and the overflow of Evergrande’s problems into global markets.
The US Federal Reserve’s financial stability report released on November 8 warned, “stresses in China’s real estate sector could strain the Chinese financial system, with possible spillovers to the United States.”
“Given the size of China’s economy and financial system, as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,” the report added.
The Fed’s report on November 8 constitutes a reversal of chairman Jerome Powell’s statement on September 22, in which he suggested that Evergrande’s problems seemed particular to China, as this news service reported on September 23. The recent u-turn indicates that the Fed’s fears of international contagion by Evergrande have increased.
In Europe, fears of Evergrande’s collapse have infiltrated Italian football club, Inter Milan, which is majority-owned by Chinese electronics retailer Suning Commerce Group. Suning risks collateral damage from a potential Evergrande default, following its 4.7 percent stake acquisition in Evergrande subsidiary, Hengda Real Estate, for RMB20 billion (US$3 billion) in late 2017.
The club posted on September 30 a record loss of €245.6 million (US$285 million) for the 2020-2021 financial year. Suning, which is listed in Shenzhen, suffered a net loss of RMB7.57 billion in the first nine months of this year, according to its financial report for the third quarter of 2021. A bankruptcy or default by Evergrande could prompt Suning to sell its stake in the football club.
Evergrande did not reply to FinanceAsia’s questions.