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China debt crunch

China Evergrande faces default test as bond coupons come due

Investors protest missing payments on wealth management products

Investors gather at China Evergrande's headquarters in Shenzhen on Sept. 13 to demand repayment.    © Reuters

HONG KONG -- China Evergrande Group's efforts to placate its creditors are facing crucial tests.

For the past three days, investors who bought wealth management products from the group have been protesting at its offices in Shenzhen to demand repayment. Next week, the focus is due to turn to bondholders as the company faces a string of 15 coupon payments through the rest of 2021, totaling $850 million.

"Evergrande is facing liquidity issues, and when everyone demands payments at the same time, then chances of a crisis start to balloon," said Hao Hong, head of research at BOCOM International. "It is going to be quite tricky to engineer a soft landing. The situation is quite precarious."

Evergrande said on Tuesday that it had retained Houlihan Lokey and Admiralty Harbour Capital as financial advisers to assess its capital structure and explore solutions to its liquidity crunch, warning that failure to roll over payments due "may lead to cross-default under the group's existing financing arrangements and relevant creditors demanding acceleration of repayment."

The group, which last week acknowledged its default risk for the first time, said two affiliates had failed to make 934 million yuan ($144.73 million) in payments in time to employees and other holders of its high-yield wealth management products. It added that it had made "no material" progress on announced plans to sell down its stakes in its listed electric vehicle and property services units or to dispose of its Hong Kong office tower.

A series of semiannual coupon payments on Evergrande's outstanding publicly traded dollar bonds begins to come due on Sept. 23, according to Refinitiv data compiled by Nikkei Asia.

Fitch Ratings, which last week warned that "a default of some kind appears probable," estimates the company has $129 million in coupon payments due by Sept. 30 and $850 million by Dec. 31. Another six payments come due in January, according to Refinitiv data.

The bond's offering documents give the company a month from the coupon date to make up the payment before a default is formally triggered, according to Samuel Hui, director of Asia Pacific corporates at Fitch.

Evergrande bonds are trading at around 30 cents on the dollar, indicating investors expect an imminent default or debt restructuring. Its shares, which had fallen another 11.6% as of late afternoon on Tuesday, have lost four-fifths of their value this year.

Evergrande has yet to default on any bonds, but suppliers and contractors have complained of unpaid bills, leading some to suspend construction at new projects while others have received properties as payment.

Some wealth management investors have also been offered a choice between taking payment in quarterly installments or getting a residential unit, office, store or parking place at a steep discount.

Security personnel barricade Evergrande's Shenzhen offices: The authorities are keen to prevent the group's troubles from causing wider economic ripples.    © Reuters

The group has $305 billion in total liabilities on its balance sheet, not including the wealth management products.

"It is now a critical time for Evergrande," said Chuanyi Zhou, a credit analyst at Lucor Analytics who publishes on the SmartKarma platform. "If the introduction of new investors does not progress well and meet the [Chinese] government's expectations, a default is likely to occur. This will likely be followed by an out-of-court arrangement with creditors, which may involve an exchange offer with extended maturities."

Asset sales could be challenging as many buyers are themselves constrained by Beijing's property sector curbs and tight credit. Evergrande's woes have spilled over to other stretched developers such as Guangzhou R&F, Fantasia Group and Xinyuan Real Estate, whose own bond prices have fallen.

An Evergrande plan to renegotiate payment deadlines with banks and other creditors has been approved by China's Financial Stability and Development Committee according to Bloomberg. Banks have yet to agree to the proposal, however, according to two people familiar with the situation.

Founded 20 years ago by Xu Jiayin, Evergrande grew to become China's largest developer on the back of a borrowing binge.

It now has $7.7 billion worth of bonds maturing next year, according to Refinitiv. The group said in a recent filing that it has 240 billion yuan in total debts due over the next year. That compares to bank deposits of 161.6 billion yuan.

Proceeds from contracted property sales fell 26% in August from a year earlier due to steep discounting, with the group warning of a "significant continuing decline in contract sales in September."

Bond investors are holding out hope for a debt restructuring that would allow them to recover a portion of their investment. An orderly restructuring will also be crucial to safeguard the interests of homebuyers who have paid for units upfront and for suppliers and contractors as well as to limit financial contagion that could have an impact on economic activity.

"The market is overly pessimistic," said Hong of BOCOM International. "While the situation is fluid, there is a precedent of an orderly exit in China," he added, pointing to the likes of troubled retailer, which secured a bailout backed by government funds and suppliers in July.

Analysts expect a creditors committee to be formed to help the company tide over the crisis.

Creditors committees work a little differently in China than elsewhere. Rather than being set up when a company requires restructuring, in China they typically form before default and function as a forum for creditors to help keep companies alive. They can collectively agree to roll over loans or extend new credit, and are a channel through which the authorities can exert pressure on all major debtholders.

"In Evergrande's case, a creditors committee could be a way to ensure the banks continue lending to the developer," said Dinny McMahon, an analyst at Enodo Economics. "It's unlikely that the authorities will bail out the developer, but they will do all they can to rescue certain creditors and limit the economic fallout."

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