Chinese developer Evergrande is edging closer to formal default, with reports suggesting that it has missed its final deadlines to pay some bondholders.
- Multiple sources have told financial news service Reuters that Evergrande has missed a payment deadline
- This would push Evergrande formally into default unless it can negotiate a deal with all bondholders
- However, Hong Kong’s share market rallied on Chinese central bank moves to lower borrowing costs
Evergrande did not make payments on some $US bonds at the end of a month-long grace period, sources familiar with the situation told Reuters, setting the stage for a massive default by the world’s most-indebted property developer.
No-one who invested in two bonds — issued by China Evergrande Group’s unit Scenery Journey Ltd — had received payment as of 1am AEDT on Wednesday, a source familiar with the situation told Reuters.
Another four sources holding the bonds confirmed to Reuters that they had not received payment.
All declined to be named because they were not authorised to talk to the media.
Evergrande has not issued any communication to bondholders about the missed payment, one of the five sources said.
“From our point of view, it has been a question of when, not if [because of] the scale of the interest payments and then early next year redemption payments has made this [default] seemingly inevitable,” said one bondholder, who declined to be named.
Failure by Evergrande to make $US82.5 million ($116 million) in interest payments due last month would trigger cross-default on its roughly $US19 billion of international bonds and put the developer at risk of becoming China’s biggest defaulter.
Evergrande was once China’s top property developer, with more than 1,300 real estate projects.
However, with $US300 billion of debts and other liabilities, it is now at the heart of a property crisis in China this year that has crushed almost a dozen smaller firms.
Adding to the crisis in China’s once-bubbling property market, smaller developer Kaisa Group Holdings was also unlikely to meet its $US400 million offshore debt deadline on Tuesday, a source with direct knowledge of the matter said.
Non-payment by Kaisa would push China’s largest issuer of offshore debt among developers after Evergrande into technical default, triggering cross defaults on its offshore bonds totalling nearly $US12 billion.
Evergrande did not respond to Reuters’ request for comment. Kaisa, which in 2015 became the first Chinese developer to default on an offshore bond, declined to comment.
Even in the case of a technical default, Kaisa and offshore bondholders could discuss forbearance terms, two sources with knowledge of the matter said.
Kaisa said it was open to discussion on forbearance, without elaborating.
Markets rally on ‘lanced boil’
Evergrande shares plunged nearly 20 per cent on Monday, while Kaisa shares lost around 11 per cent across Friday and Monday on the Hong Kong Stock Exchange.
However, both companies bounced back slightly yesterday, rising 1.1 per cent each.
NAB’s head of foreign exchange strategy, Ray Attrill, said markets reacted to the news of Evergrande’s default with some perverse relief.
“News yesterday that Evergrande had missed the deadline for making a coupon payment on $US debt, and seemingly triggering a wave of cross-defaults, has been seen as more cathartic than troublesome,” he noted.
That saw a broader rally for Hong Kong’s Hang Seng share index, which climbed 2.7 per cent as China’s central bank also eased some key policy settings.
The People’s Bank of China lowered the required reserve ratio for most banks by 50 basis points, effectively allowing them to lend more at a lower cost, and instituted targeted rate cuts for certain borrowers.
“Neither of these moves, in isolation, constitutes a major loosening of monetary conditions, but we think that they signal a growing desire of policymakers to lower borrowing costs,” wrote Oliver Allen from Capital Economics.
However, Mr Allen warned that investors should not expect the Chinese government to simply reinflate the country’s property bubble.
“In the past, turning points in China’s ‘credit cycle’ seem to have preceded turnarounds in economic growth there, also often prompting strong gains in certain risky assets,” he noted.
“That includes not only China’s stock markets, but also industrial metals and those equity indices in many emerging markets in which commodity producers have a large weight.
“This was the case following the Global Financial Crisis, China’s growth slowdown in 2014-15, and the large stimulus [that] drove the economy’s recovery after the COVID-19 shock early last year.
“However, we doubt that we are on the cusp of a turnaround of a similar scale.
“Unlike in most other economies, the authorities in China steer credit growth not only through influencing the price of credit, but also through various quantitative controls.
“We expect the PBOC to cut its policy rates soon. But we suspect that this will largely be aimed at lowering borrowing costs and reducing financing strains for many heavily indebted borrowers as the economy continues to slow.
“At the same time, we think that ongoing concerns about the extent of leverage within China’s economy mean that the authorities there will not want to ease quantitative restrictions on credit growth substantially.”