A Formal Default is Nearing for Evergrande

The Evergrande debt crisis that has plagued the Chinese property development sector is coming to a pivotal moment this week when the grace period for the September 23 Dollar bonds ends.

The embattled real estate developer failed to meet a coupon payment of USD 83.5 million to global creditors on September 23, which had a 30-day grace period. This was followed by another four missed payments on Dollar bonds.

Failure to meet any of the payments after the 30-day grace period would result in a formal default, which will force Evergrande to have its assets liquidated to pay back its creditors. Evergrande has liabilities of more than USD 300 billion.

Evergrande has maintained an opaque stance on its Dollar debt obligations and has not announced official statements or replied to any inquiries, regarding offshore creditors. 

Contagion

Fears continue to grow that the Evergrande liquidity crunch has started to overflow to other Chinese developers, especially after regulation implemented strict controls over the property market’s ability to finance itself through debt.

Other developers have already started feeling the offshoots of the crisis.

October saw the surprise default of Fantasia Holding and another warning from Sinic Holdings Group Co. about a possible default.

Global rating agencies, Fitch Ratings and Moody’s downgraded property developer Modern Land, citing the distress in debt exchange after asking for longer maturity on a Dollar bond.

Greenland Holding also received a credit rating cut from Standard & Poor’s.

Bloomberg data show that at least 99 Chinese companies are facing coupon repayment pressure of around USD 84 billion.

Global high-yield Dollar bonds, trading at more than 10 percentage points, are 46% owned by the Chinese real estate sector, which amounts to around USD 64 billion, according to data compiled on October 12 by Bloomberg.

Impending Payment Deadlines

China’s Measures to Avoid Crisis

On Friday, October 15, Bloomberg reported that the People’s Bank of China (PBOC) decided to loosen restrictions on home loans in the most prominent Chinese banks.

The report said that in September, the central bank permitted major banks to apply to sell mortgage-backed securities to expand their loan quotas, which goes against a ban imposed in early 2021.

This comes after a report showing that aggregate financing in China fell considerably in September from the same month a year ago and from August as well. On October 18, the National Bureau of Statistics showed a 16.9% decrease in home sales by value, after a near 20% drop in August.

PBOC’s actions will be crucial in providing a cushion for developers regarding their liquidity problems, especially if Evergrande suffers from a formal default on October 23.

China’s growth forecasts continue to be revised lower. It is now expected to grow less than 5% in 2021, causing market participants and analysts to expect further Monetary Policy easing by the PBOC.

The bank is expected to shed 25 basis points of interest rates in 2022 to help with the credit crisis and sustain economic growth.

The central bank reiterated on October 17 that the fallout of the crisis can be contained and are controllable, and unlikely to spread.