The new week began with a smattering of stagflation headlines and news that Guangdong-based Hopson Development Holdings plans to acquire a 51% stake in Evergrande’s property-services unit.
All associated shares were halted. Evergrande cited “a major transaction.” Hopson said the same, noting it was poised to announce an agreement “to acquire the shares of a company.”
Cailian, a Chinese financial news portal, said the deal valued Evergrande Property Services Group at just over HKD40 billion. It went public late last year at a valuation of HKD95 billion. As you can imagine, things haven’t gone particularly well (figure below).
Hopson’s dollar bonds plunged on the news. Evergrande’s rose.
Evergrande is in the process of raising money wherever it can, aided and abetted by Beijing. Late last month, Evergrande sold a $1.5 billion stake in Shengjing Bank to a state-controlled entity. The company’s stake in the bank, which it pared in August as well, was once its most valuable financial asset, worth nearly $3 billion.
The company is staring down a daunting calendar (figure below). It’s already missed some loan payments and markets weren’t amused with the ambiguous wording of a statement related to interest payments due last month on a yuan-denominated obligation. A few days later, an $83.5 million coupon payment on a dollar-bond came due.
Apparently, a $260 million dollar note guaranteed by Evergrande came due Sunday. It was issued by something called Jumbo Fortune (try not to laugh). Holders began forming a committee last week in anticipation of a default.
Long story short (I mean, I don’t know much more about it than you do, but I assume it’s a long story), the obligation came about as a result of a JV involving Hengda Real Estate, Evergrande’s principal onshore unit. The bond is also guaranteed by Tianji Holding, which isn’t much help because it’s a unit of Hengda.
There’s no grace period, so nonpayment of principal is a default. However, in the event of an “administrative issue” or “technical error,” there’s a five-day cushion. I’m not sure if “We don’t have the money” qualifies as an “administrative issue” or a “technical error.” You’d have to ask the holders.
In any case, the Hopson deal would presumably give Evergrande some liquidity to paper over a few cracks as work continues behind the scenes with regulators, creditors and investors to avert calamity. Last week, Evergrande managed to make payments to some irritable wealth management product holders. Beijing reportedly instructed Evergrande to do everything possible to placate retail investors in order to avoid social unrest.
Other developers have seen their dollar bonds plunge amid debt concerns and generalized angst around anything to do with China’s property sector. Notes issued by Sunac China Holdings trade around 85 cents on the dollar, for example.
“Fantasia Holdings Group’s dollar bonds plummeted as the company inches closer to a $208.2 million debt repayment deadline Monday,” Bloomberg reported, documenting another crisis of confidence. “The firm’s bond due December 17 fell about 29 cents on the dollar to 38.2 cents, set for its biggest-ever daily drop, a move mirrored by another dollar note maturing the next day,” the same linked article read. The Shenzhen developer’s 2023 notes trade at 25 cents on the dollar.
But don’t worry. Evergrande contagion risk is low. And even if it wasn’t, it’s not like Chinese property is the largest asset class on the planet or anything.
All the strategists bellowing about higher interest rates around the world may be missing the boat. Credit events drive risk free and low risk rates LOWER. At the very least these kind of events put a cap on high grade rates.