The main unit of the China Evergrande group said it would make a coupon payment on its domestic bonds on time, offering some relief to nervous markets worried that a default by China’s No.2 developer could spill over to the market. global financial system.
Hengda Real Estate Group said in a statement on Wednesday that it will make the coupon payment on its 5.8% bond traded in Shenzhen in September 2025 on time on September 23.
The announcement comes as Evergrande, once the nation’s best-selling developer, approaches a key deadline for paying interest on a dollar bond, with financial markets strained even as investors and investors alike. Analysts have played down the threat that his problems will become the country’s “Lehman”. moment. ”The major US investment bank went bankrupt in 2008 amid the subprime mortgage crisis.
Hengda Real Estate’s coupon payment amounts to 232 million Chinese yuan ($ 35.88 million), according to data from Refinitiv.
“We’re still trying to figure out what this payment means for the other bonds but I imagine they would want to stabilize the market and make other coupon payments, given the scrutiny,” said a source close to the situation that refused to be identified as they are not allowed to speak to the media.
Futures on US stocks, the yuan and the risk-sensitive Australian dollar rose, while safe-haven assets such as the yen and US Treasuries fell.
Evergrande is expected to make the payment of its onshore bond on time, but the developer has not indicated whether it will be able to pay $ 83.5 million in interest owed on its March 2022 bond on Thursday. He has another payment of $ 47.5 million due on September 29 for the March 2024 tickets.
Both bonds would default if Evergrande does not pay the interest within 30 days of the scheduled payment dates.
Trading in Evergrande’s onshore exchange-traded bonds has been halted since September 16, when Hengda Real Estate requested a one-day suspension of trading. While trading technically resumed a day later, it now only takes place through trades traded in what traders said was an attempt to reduce volatility.
“Calm the nerves”
As concerns about the fallout from a disorderly collapse rocked markets on Monday, US stocks were flat on Tuesday and Chinese stocks fell early in the session after a two-day public holiday. But the Chinese real estate index recouped its losses and rose more than 3%, while bank stocks fell around 3%.
Evergrande is so deeply tied to the wider Chinese economy – from retail investors to infrastructure-related companies that are an indicator of global commodity demand – that contagion fears have held financial markets in suspense.
“There have been quite a few concerns about the possibility of contagion,” analysts at New York-based Bespoke wrote in a research note Tuesday. “But so far that concern has not manifested itself in parts of the credit markets which have served well as red flags for larger credit crises in the past.”
China’s central bank helped boost sentiment with a raw injection of short-term liquidity into the financial system after concerns over a debt crisis in Evergrande rocked global markets.
The People’s Bank of China (PBOC) injected 120 billion yuan ($ 18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan (13.9 billion billions of dollars).
“The net injection of the PBOC is likely meant to ease nerves as the market worries about Evergrande,” said Eugene Leow, senior rate strategist at DBS Bank Ltd in Singapore. “While the goal may be to instill discipline, it is also necessary to prevent contagion to the real economy or other sectors.”
The need to calm market nervousness is pressing amid losses in China-related stocks around the world in recent days amid concerns over Evergrande’s debt issues.
Evergrande failed to pay interest owed Monday to at least two of its largest bank creditors, Bloomberg news agency reported on Tuesday, citing people familiar with the matter. The missed payments were expected as China’s Housing Ministry said the company would not be able to pay on time, Bloomberg said.
As investors and policymakers around the world tried to assess the potential fallout, Securities and Exchange Commission (SEC) Chairman Gary Gensler said the U.S. market was better positioned to absorb a potential global shock from a corporate default than it was before 2007 – 2009 financial crisis.
Growing position of funds
Federal Reserve Chairman Jerome Powell will likely be asked about the fallout from Evergrande when he speaks after the two-day Fed meeting that ends Wednesday at 2 p.m. ET (6 p.m. GMT). The Federal Reserve is commonly referred to as the Fed.
Despite the impending default, some funds have increased their positions in recent months. Fund giant BlackRock and investment banks HSBC and UBS have been among the biggest buyers of Evergrande debt, according to Morningstar data and a blog post.
Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager.
In any default scenario, Evergrande, oscillating between a messy meltdown, a managed meltdown, or the less likely prospect of a bailout by Beijing, will have to restructure bonds, but analysts expect a low recovery rate for investors.
S&P Global Ratings said on Monday that it believes the Chinese government will act only in the event of a large-scale contagion presenting systemic risks to the economy.
“I would characterize Evergrande as a telegraphed, controlled detonation,” said Samy Muaddi, portfolio manager of the $ 5.1 billion T Rowe Price Emerging Markets Bond fund, which has no position in the company.
BNP Paribas estimated in a research note that less than $ 50 billion of Evergrande’s $ 300 billion outstanding is financed by bank loans, suggesting that the Chinese banking sector will have a sufficient buffer to absorb the debt. potential bad debts.
Subsidiaries of Citigroup Inc serve as trustee and payment agent for a China Evergrande bond that matures in March 2022 and has interest of $ 83.5 million due Thursday.
“We have no direct exposure to Evergrande; our indirect exposure through counterparty credit risk is low and without a single significant concentration, ”Citigroup spokesperson Danielle Romero-Apsilos said in an email on Tuesday. She declined to comment on Evergrande’s planned payments.
Hong Kong-listed shares of Evergrande fell 7% on Tuesday, after falling 10% the day before amid fears its $ 305 billion debt could cause widespread losses in China’s financial system if it collapses. The Hong Kong Stock Exchange was closed on Wednesday for a public holiday.