China Evergrande approached a potential default on Friday, prompting investors fears that interest has expired without any announcement from the property giant, whose mountain of debt has rocked world markets.
The company is owed $305 billion, is running short of cash and investors are concerned that a collapse could pose systemic risks to China’s financial system and reverberate around the world.
The deadline to pay $83.5 million in bond interest passed without comment from Evergrande or any indication that bondholders would be paid. The firm is now in uncharted waters and enters a 30-day grace period. If he passes without payment it will be a default.
“It’s a period of terrible silence because no one wants to take big risks at this stage,” said Howe Chung Wan, Head of Asia Fixed Income at Principal Granthshala Investors in Singapore.
“There is no precedent in the shape of Evergrande … we will have to see in the next ten days, before China goes on holiday, how it plays out.”
China’s central bank again injected cash into the banking system on Friday, in what was seen as a sign of support for the markets. But officials are silent on Evergrande’s situation and China’s state media have given no clue on the rescue package.
Evergrande hired financial advisors and warned of default last week, and world markets fell sharply on Monday amid fears of contagion, though they have stabilized.
The puzzle for policymakers is how quickly they can enforce financial discipline without fueling social unrest, as an ugly collapse in Evergrande could crush a property market, which holds 40% of Chinese domestic wealth.
Opposition to disgruntled suppliersHomebuyers and investors last week painted discontent that could spiral into crisis situations that spark a default on other developers.
Evergrande has promised to prioritize such investors and this week resolved a coupon payment on domestic bonds. But it has said nothing about offshore interest payments that were due Thursday or about $47.5 million due next week.
Bondholders are starting to think that it may be a month or so before things become clear and the markets have already assumed they’ll get a big haircut.
“Current market pricing estimates suggest investors’ recovery in Evergrande’s dollar bonds is likely to be very low,” said Jennifer James, portfolio manager and lead emerging market analyst at Janus Henderson Investors.
“The likely outcome is that the company will engage with creditors to come up with a restructuring agreement,” she warned, adding that if such a deal is managed incorrectly “the loss of trust could have a contagious effect. “
play for time
Granthshala markets have begun to correct after a sharp sell-off following Evergrande’s plight, trading on the premise that the crisis can be contained.
Evergrande only has some $20 billion in debt outstanding offshore. Yet the risks at home are substantial as risks to China’s property sector are a huge pool of wealth.
“Housing sales and investment could inevitably slow further – this would reduce GDP growth by about 1 percentage point,” Societe Generale analysts said in a note.
“The longer policymakers wait before taking action, the harder the risk of landing.”
So far there have been few signs of official intervention. The People’s Bank of China’s 270 billion yuan ($42 billion) cash injection this week is the biggest weekly total since January and has helped put a floor on the bottom of shares.
Bloomberg Law also reported that regulators had asked Evergrande to avoid a near-term default, citing unidentified people familiar with the matter.
However, the Wall Street Journal, citing unnamed officials, said officials had told local governments to prepare for Evergrande’s fall.
“Given the deliberate pace of Chinese policymaking, officials may choose to play for time,” said Wei-Liang Chang, macro strategist at DBS Bank in Singapore.
They said they could extend liquidity support through a grace period on Evergrande’s coupon payments, noting that there is no dollar bond maturity until March 2022.
Shares of Evergrande returned some gains on Friday and fell 6% on Thursday, while stock of its electric-vehicle unit fell 18% to a four-year low. Its bonds fell slightly on Friday and traded about 30 cents on the dollar due to payments that came with its offshore bonds. ($1 = 6.4589 Chinese Yuan Renminbi)
(Reporting by Tom Westbrook. Additional reporting by Claire Jim in Hong Kong and Andrew Galbraith in Shanghai; Editing by Stephen Coates)