Analysis-Investors denied their evergrande finale … for now

The aerial photograph shows a house on October 22, 2021 at the construction site of the Evergrande Group Project, an Evergrande Group project in China, located in Taicang, Suzhou, Jiangsu Province, China. Taken with a drone. Reuters / Xihao Jiang

October 22, 2021

Mark Jones and Andrew Galbraith

London / Shanghai (Reuters) – Investors who saw a crisis in China’s real estate sector in recent months saw the Evergrande Grand as the world’s most debt-rich developers evaded the $ 19 billion default. The finale was rejected, but it may not take long to wait.

The troubles of the China Ever Grande Group have been snowballing for months. The declining resource set for a debt of 2 trillion yuan ($ 305 billion) has wiped out 80% of its value this year, and there is still an invoice flow to be paid.

Economists are worried that they will lose control of the implosion of super-sized builders, overthrowing other developers and turning the already defined crisis of the world’s second-largest economy into a full-blown disaster. ..

So far, the decision to transfer the $ 83.5 million required to pay a one-month delinquent bond coupon has stopped the disaster.

Himanshu Porwal, Corporate Credit Analyst at Seaport Global in London, said:

“But they’re not out of the woods. There’s a huge time bomb with a short-term debt of $ 37 billion.”

Evergrande will need to make $ 195 million overdue coupon payments, along with the following major deadlines to avoid the October 29th and November 10th defaults. Then there will be an additional $ 340 million in international market bond payments this year and an additional $ 6.1 billion next year. And tens of billions for municipal bonds and bank loans.

The borrowing market is back again as many small developers have already been pushed to the wall and about one-third of sector cross-border bonds need to be refinanced by the end of next year, according to Fitch. Must be opened. ..

It takes confidence, but it’s almost completely depleted by the Evergrande story. In order for a company to survive, it needs to sell its assets quickly, which is tricky.

Just this week, the $ 2.6 billion stake failed and the Hong Kong headquarters sale plan collapsed.

Still, Hayden Briscoe, Head of Asia Pacific Bonds at UBS Asset Management, believes Evergrande’s assets are worth more than the bond price hit by 20-27 cents in dollars.

“The factor of surprise here is actually distorted in the opposite direction, and the surprise is upward.”

Lehman Moment

Omotande Laural, head of emerging market corporate debt at asset manager Barings, said the darkest moments were in the midst of the Evergrande turmoil suddenly defaulted by another large real estate firm, Fantasia. Said that.

While the worst defeats were primarily limited to Asian high-yield markets, risk premiums, or spreads, investors demanded that Asian real estate firm bonds soar to nearly unprecedented 1200 basis points. I did.

“We felt like we were back in a moment like Lehman,” Laural said of the collapse of investment banks in 2008. Real estate sector. “

Graphics: Evergrande is the second largest by default for EM companies

Game changer

Founded in Guangzhou in 1996, Evergrande symbolizes China’s bohemian borrowing and architectural era, designed by Beijing to curb developer debt frenzy and promote affordable housing. It has come to an end with hundreds of new rules.

According to analysts, the current picture is what’s happening with Evergrande’s assets and more than 1,300 real estate projects in more than 280 cities, and its impact on the wider real estate sector, which accounts for a quarter of China’s economy. Is the default or rebuilt.

Canceled as a forgery by Evergrande, but taken seriously by analysts, the leaked 2020 document showed debt to over 128 banks and over 121 non-banking institutions.

Graphic: Bonds in the major real estate sector are sold due to the Evergrande crisis

Evergrande’s predicament is also whether some Chinese companies are really too big to fail, especially after Beijing’s crackdown on tech giants like Alibaba and Tencent wiped out nearly $ 1 trillion from its market earlier this year. Rekindled the debate about.

Colm d’Rosario, co-head of Amundi’s EM Corporate & EM High Yield Bonds, said in both cases that the government is currently focusing on “common prosperity” while unrestrained corporate debt accumulation. Said that it indicates that the acceptance of Amundi has changed.

Debt analysts hope that the damage caused by Evergrande will not be widespread. China accounts for just over a quarter of JP Morgan’s $ 1.4 trillion CEMBI index, a benchmark for emerging market corporate debt buyers, 6.7 billion of Evergrande’s $ 19 billion international bond debt. Only $ 50 million is included.

Jeff Grilles, a veteran emerging market crisis watcher who heads the EM fixed income division of Aegon Asset Management, a US fund, said:

“The Chinese government wants to curb excessive risk, not the real estate bubble.”

He said some money managers may readjust risk indicators, but the current crisis should not allow people to postpone investment in China altogether.

Graphics: Evergrande issues remained included in China’s high-yielding sector

(Report by Mark Jones, edited by Kirsten Donovan)

Analysis-Investors denied their evergrande finale … for now

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