Evergrande returns to worry the world. China's $305 billion-debt real estate giant failed to pay a round of coupons on dollar bonds with coupons due Monday. It is the third time this has happened in a few weeks after the non-payment of two bond coupons worth, respectively, 83,5 and 47,5 million dollars. This time the total amount is even higher: it is second Bloomberg, coupons for $148 million on the issues of April 2022 (68,88 million dividends), April 2023 (42,5 million) and April 2024 (36,75 million).
The news, reported by the major international agencies, has not yet been confirmed by Evergrande which at this point will have 30 days to repay the investors, after which bankruptcy will trigger. The problem is that the hands already started ticking weeks ago after the first unpaid payment on September 23rd. Which means that if by 23 October the Chinese company does not repay the amount due, it will be officially defaulted.
Therefore, fears about Evergrande's fate are increasing day after day, but also about the consequences that its possible default could have on the entire Chinese real estate system which, alone, is worth 28% of Beijing's GDP. According to Refinitiv data, they will expire in 2022 over 100 billion dollars of bonds issued by Chinese real estate firms: “There will be more defaults in the future if the liquidity problem does not improve significantly,” broker CGS-CIMB predicted in a note. Not only that, according to analysts, half of the 30 major Chinese manufacturers have already crossed at least one of the three red lines relating to the ratio between debt, capital, share value and liquidity, introduced by the authorities to try to curb the speculations.
To remedy the problem, the liquidity injected into the financial system by the Central Bank of China does not seem to be enough to appease the concerns of investors, nor do the operations carried out or planned by Evergrande. In fact, we recall that the company has sold its stake in the Shenyang bank for 1,5 billion dollars and is negotiating the sale of 51% of the subsidiary Property Services to another real estate group, Hopson Development, for 5,1 billion. Both titles were suspended from the Hong Kong Stock Exchange last October 4th. Operations that aim to save what can be saved, but which US investors do not like. Not surprisingly, a group of bondholders holding $2,5 billion in Evergrande bonds has turned to the firm Kirkland & Ellis and the investment bank Moelis & Co. to block asset sales that could frustrate expectations of foreign bondholders.
Meanwhile, other companies are starting to experience problems with cash flow and liquidity. The first is Fantasia Holdings, a real estate group in the luxury sector, which a few days ago announced the resignation of two of its three top managers. In early October, the company failed to repay a $205,7 million bond to its creditors. One of the two outgoing directors, Ho Man, declared "that he was not promptly informed on certain issues of critical importance to the company". Fantasia is therefore left with only one director while the rules of the Hong Kong Stock Exchange, where the stock is currently suspended, require the presence of at least three directors. Problems for too Sinic Holdings, which has already made it known that it could not repay the principal value and the last tranche of interest on a $250 million bond due on October 18. It's no better at modern land, which just yesterday asked for a three-month deferment on the payments of a 250 million dollar bond that expires on October 25th. The whole industry, by the way, is suffering downgrades upon downgrades with the three sisters of the rating – Moody's, Fitch and S&P – which have cut ratings 91 times as of 30 September.
"Evergrande is just the tip of the iceberg”, declared al Financial Times Louis Tse of Wealthy Securities, a Hong Kong brokerage firm. According to the broker, the engine of the crisis of the Asian giant and of the entire real estate sector has been the request to repay the debt by structures which, at their base, are in turn at risk of being infected. “The worst part of the story is that not only is China Evergrande collapsing, but other Chinese developers are also drowning in the tsunami,” Singapore-based Lucror Analytics Zhou Chuanyi told the South China Morning Post. "For companies with large amounts of maturing debt, a couple of months of cash shortage could be devastating."
