China Evergrande Group appears to have finally lapsed into default.
The debt-laden developer made three 11th-hour coupon payments over the past two months, but there was no repeat at the end of a grace period at midnight on Monday in New York – as some bondholders did not receive their dues, four sources said.
Failure to make $82.5 million in interest payments due on Monday following a 30-day grace period looks to be Evergrande’s first offshore default on a public bond.
This would be China’s biggest ever default and is likely to ripple across the property sector and around the world. It will also trigger cross-defaults on all the company’s about $19 billion of bonds in international capital markets.
The embattled developer on Monday said it had set up a risk management committee, including officials from state entities, which would play an important role in “mitigating and eliminating the future risks” of the group.
The seven-member risk management panel has only two executives from Evergrande plus officials from state entities. This has raised expectations the government could get more involved in managing the group’s huge debts, while wrapping in its offshore obligations.
The committee has been set up “in view of the operational and financial challenges” Evergrande is facing, according to a filing with the Hong Kong stock exchange on Monday.
Guangdong’s provincial government is now sending a working team to the company, which analysts at Jefferies said indicates a “potential takeover of Evergrande”.
A flurry of regulator statements has also signalled that officials are working to contain the fallout at China’s second-largest developer by volume.
“Evergrande’s disclosures and the ensuing government statements were well coordinated, pointing to formal beginning of Evergrande’s debt restructuring,” Nomura’s chief China economist Lu Ting said in a note.
The regulators’ comments suggested “global investors should take responsibility for their own decisions to invest in Evergrande’s dollar bonds and the Chinese government will not provide a hard guarantee to indebted companies like Evergrande,” he added.
While the developer does not have any more onshore or offshore bonds maturing this year, it has $255.2 million in coupon payments due on December 28.
On Tuesday morning, the company’s stock clawed back as much as 8.3%, after losing 20% a day before, as the property developer moved closer to restructuring a debt pile so big that default could reverberate across borders.
Market participants across the globe have been watching to see if the world’s most-indebted property developer, with over $300 billion in liabilities, could make its latest bond payments.
‘No Guarantee On Repaying Debt’
This is no surprise, given that creditors had demanded $260 million last week and the company said late on Friday it could not guarantee funds to repay debt. That prompted authorities to summon its chairman and reassure markets that broader risk could be contained.
By midday on Tuesday, Evergrande stock – which hit a record low on Monday – had trimmed gains to 0.6%, leaving it at HK$1.82.
Notes due on November 6, 2022 – one of two tranches nearing payment deadline – traded at 18.282 cents on the dollar, Duration Finance data showed, little changed from Monday.
Other issuance including a 2024 bond were trading at record lows.
Kaisa in Last-Minute Talks
The firm is just one of a number of developers starved of liquidity due to regulatory curbs on borrowing, prompting offshore debt default and credit-rating downgrades, while investors have sold off developers’ shares and bonds.
Smaller peer Kaisa Group Holdings – China’s largest offshore debtor among developers after Evergrande – also risks defaulting on a $400 million bond maturing on Tuesday having failed to make a deal with bondholders.
To avoid an overall default, bondholders owning over 50% of 6.5% notes due on December 7 sent Kaisa draft terms of forbearance late on Monday to work toward a solution, a person with direct knowledge of the matter said. Kaisa started discussing forbearance with bondholders last week, the person said.
Another person with direct knowledge said discussions are at preliminary stages and that it would take time to finalise terms.
The people declined to be identified as the information was confidential.
Kaisa said it was open to a discussion on forbearance, without elaborating.
Sources previously said that the bondholders, had offered Kaisa $2 billion in funding last month but that no major progress on the offer was made.
Shares of Kaisa – the first Chinese developer to default on an offshore bond in 2015 – rose 3.3% on Tuesday.
- Reuters and AFP with additional editing by Jim Pollard
This report was updated with further information on December 7.
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