Some folks weren’t paid. Or at least not immediately.
Holders of two Evergrande dollar bonds with coupons due Monday hadn’t received funds as of 5 PM in Hong Kong, Bloomberg reported, noting that in total, across three bonds, the beleaguered developer at the center of China’s burgeoning property crisis was obliged to pay nearly $150 million in interest Monday.
The company is staring down a daunting calendar. 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. And then there’s the Jumbo Fortune story. And don’t forget about Fantasia.
While the consensus is still that Beijing will manage to avert some manner of systemic meltdown, it’s obvious that growth will decelerate dramatically due to the property curbs.
Several of Evergrande’s bonds have 30-day grace periods, which the company and Chinese officials are likely using to negotiate some manner of restructuring that placates markets, pacifies individual investors and sidesteps an outright bailout which Beijing is keen to avoid, given the read-through for moral hazard.
If you’re wondering how acute the situation is, there are all manner of ways to conceptualize it, but note that thanks to the Fantasia debacle, offshore defaults have already exceeded Goldman’s projection for all of 2021 (figure below).
As you can see, things could get considerably worse depending on what transpires over the above-mentioned grace periods.
Between Evergrande and Sinic, there’s some $20 billion of offshore bonds outstanding. If the companies don’t figure something out vis-à-vis missed payments, the YTD default rate would skyrocket to nearly three times Goldman’s original forecast.
While non-property defaults have moved lower, and although the overall pace of new onshore defaults is actually the slowest since 2017 ex-Evergrande and Sinic, onshore property bond defaults are at record highs. “The majority of defaulted property issuers have both onshore and offshore bonds outstanding,” Goldman noted, adding that so far, 2021 has seen a half-dozen new onshore defaults from property developers.
The onshore market faces the same daunting prospects as the offshore market in the event Evergrande and Sinic don’t rectify missed payments (figure on the right, above, from Goldman).
On Monday, Sinic said it doesn’t expect to make principal payments or the last installment of interest due later this month for a $250 million issue. An event of default will likely occur, the company said. Apparently, cross-defaults may trigger bonds maturing in January and June.
As Reuters wrote, recapping, “Sinic said in September a creditor had demanded repayment of principal and accrued interest totaling $75.4 million due to overdue payments on onshore financing, and that the creditor had appointed receivers over the shares of certain offshore units.” That enforcement action “triggered conditions under which other financing arrangements and bonds worth $710 million may become immediately payable if creditors choose to enforce that.”
Shares of Sinic have been halted since September 20.
Commenting earlier this month, Goldman wrote that although Beijing has “zero tolerance for systemic risks… we do not expect policymakers to adopt a reflationary stance towards the property sector, as deleveraging remains an important policy goal.”
Oops. Does sound eerily familiar for much the same reason.
If we must whistle past this graveyard, we probably should agree on a tune, preferably in a minor key.