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China debt crunch

BlackRock, UBS and HSBC Evergrande bond holdings rise

Chairman Xu Jiayin says company will 'walk out of its darkest moment'

Security personnel seal off Evergrande's offices in Shenzhen. Chinese authorities are keen to prevent the group's troubles from causing wider economic ripples.   © Reuters

HONG KONG -- Even as China Evergrande Group's bonds have fallen toward 25 cents on the dollar amid worries the developer will default, fund managers including BlackRock, UBS and HSBC Holdings have been increasing their holdings of the debt.

Some funds have added Evergrande bonds "given widening spreads and attractive valuations," said Patrick Ge, a research analyst at Morningstar. "This is in line with what we have heard from some managers where they said that at its current levels, they believe Evergrande is a buy."

Evergrande, the world's most indebted developer, has more than $300 billion in outstanding liabilities.

It faces a series of bond coupon payments starting Thursday though it will have a month's grace period to avoid default on each. The company is fast running out of cash and has begun offering suppliers and retail debt investors discounted apartments, parking spaces and storefronts in lieu of missed payments.

Xu Jiayin, Evergrande founder and chairman, said in a letter to staff on Tuesday that the company is confident it will meet its responsibilities to customers, investors and lenders.

"I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible," he said.

As of June 30, BlackRock, UBS, HSBC and Ashmore Group were the biggest holders of Evergrande's international bonds, data compiled by Bloomberg shows, with a combined stash worth $1.3 billion at that time.

According to data compiled by Morningstar, while all the top holders but Ashmore added to their positions between January and August, other major investors including funds run by PIMCO, Allianz and Fidelity were net sellers. In all cases, the holdings represented a small proportion of the funds' overall portfolio.

"As with many sectors we invest in, we closely monitor developments in the real estate sector," said an HSBC spokesperson. "Our exposure to China's real estate market is within our risk appetite."

HSBC's Asia High Yield Fund, which has grown 80% this year, added 17.2 million units of Evergrande debt between January and July, the Morningstar data showed. Each Evergrande unit generally represents a bond with a face value of $1,000. Evergrande represented 1.2% of the fund's portfolio as of July 31.

BlackRock's equivalent fund expanded its Evergrande holding from 12.2 million units to 43.5 million over the first eight months of 2021 as the fund's size nearly quadrupled. Evergrande represented about 1% of its portfolio as of Aug. 31.

A representative for BlackRock declined to comment while UBS did not have an immediate comment. It is not yet clear if the funds have reduced or added to their position this month.

Despite the additions, total Evergrande exposure as a portfolio share fell for all the funds in large part because of the slump in Evergrande bond values. Evergrande bonds were trading at almost 85 cents on the dollar at the start of the year.

Other investors known to have built positions in Evergrande's offshore bonds include Saba Capital, Redwood Capital Management, Contrarian Capital Management and Silver Point Capital, Bloomberg reported on Tuesday.

"Evergrande's dollar Bonds may be oversold," said Brock Silvers chief investment officer at Kaiyuan Capital in Hong Kong. "There seems little choice for all parties but to keep the company alive as it works toward a more stable balance sheet. The company has assets to monetize, and Beijing has the ability to create some runway. Offshore bondholders may take a haircut in the end, but current pricing seems too pessimistic for me."

Investors expect the Chinese authorities to facilitate an orderly exit to ensure the fallout from Evergrande's woes do not hurt the nation's $50 trillion financial system.

Evergrande owes tens of billions to homebuyers who have paid the full price for uncompleted apartments as well as to banks, suppliers and contractors. It also has an unknown amount of off-balance sheet liabilities largely due to trusts which invest in corporate debt on behalf of retail investors.

The group's debts due within a year stood at 240 billion yuan ($37.1 billion) as of June 30, compared with bank deposits of 161.6 billion yuan. Some 74.86 billion yuan of the deposits are "restricted," according to the company.

Analysts expect the government to help Evergrande navigate the challenges by asking banks to roll over debt and pushing state-owned enterprises to take over unfinished projects. However, some also foresee a total liquidation of the group, which has 800 projects under construction, with more than half halted due to the cash crunch.

"From my perspective, the bonds are not yet attractive enough," said Iris Chen, a credit analyst at Nomura in Hong Kong. "We estimate the recovery rate to be about 25 cents on the dollar for Evergrande curve, but if some of the off-balance sheet items or hidden debt takes precedence over the offshore bonds then the rate can go down even further."

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