Chinese Evergrande Group avoided default a second time today by making an overdue interest payment on dollar-bonds, cutting it close to the end of its 30-day grace period, according to the Wall Street Journal.
Evergrande, formerly China’s top-selling developer, was able to stave off default last week by securing $83.5 million for a last-minute payment on interest bonds. Today, the company delivered $47.5 million in coupon payments to bondholders.
A failure to meet today’s deadline would have triggered a cross-default on the company’s $19 billion worth of bonds in international capital markets — what would have been the world’s second-largest corporate debt default ever. By making these last-minute payments, Evergrande has bought time to negotiate with creditors and organize its finances.
Although no one from Evergrande has confirmed where the money came from to repay these debts, Bloomberg news reported earlier this week that Chinese authorities urged billionaire Chairman Hui Ka Yan to use his own personal wealth to pay bondholders. Clearly, Beijing has no intention of bailing out their homegrown star, even as the crisis spreads to other developers and destroys consumer sentiment in the real estate market. Bloomberg speculates that this is part of Chinese President Xi Jinping’s plan to crack down on the billionaire class as part of his “common prosperity” campaign to reduce the wealth gap.
Even as a successful billionaire and one of the richest people in China, it’s doubtful that Yan will be able to make a dent in Evergrande’s liabilities, which swelled to $300 billion in June.
After benefiting from years of rapid, debt-fueled growth, and running up obligations of more than $5 trillion, the dominos are beginning to fall. A string of defaults by smaller developers — including China Properties Group Ltd., Fantasia Holdings Group Co., Modern Land (China) Co. and Sinic Holdings (Group) Co. — have hammered down the price of bonds issued by financially weaker players, which in turn raises the yield of bonds.
As bond yields rise, smaller developers are shut out of the international bond market. Since many of these developers have hefty refinance needs, this further increases widespread default risk. Some firms, however, have been able to raise funds through asset sales. According to the Wall Street Journal, Sunac China Holdings Ltd. sold about $554 million worth of shares in KE Holdings Inc., the U.S.-listed Chinese online real-estate brokerage firm. Sunac reportedly said it would use the proceeds for general working capital.
Evergrande, for its part, has been trying to raise funds by selling shareholdings and its office block in Hong Kong. Additionally, the company sold its holding in a Chinese bank, but called off a $2.6 billion deal to sell a majority stake in its subsidiary, Evergrande Property Services Group Ltd.
According to Reuters, one bondholder said he maintains a negative outlook for the developer, despite the two recent coupon payments. "I only think they are buying time at this point," the bondholder reportedly said.
Throughout September and October, Evergrande missed coupon payments nearing $280 million on its dollar bonds, triggering a 30-day grace period for each deadline. The group still has $338 million in additional offshore coupon payments coming due in November and December.
In a more positive outlook, Cliff Zhao, chief strategist in China Construction Bank International in Hong Kong, said there will be some negotiations between Evergrande and its lenders. “Some sort of haircut is still possible,” Zhao told reporters from Reuters. “The market still needs some time to digest and to price this in.”
