Evergrande staves off default, paying US$83.5 million of overdue offshore bond coupon before 30-day grace period runs out

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China Evergrande Group paid the US$83.5 million interest payment on its offshore bond, just before a 30-day grace period runs out for declaring it in default, as the world’s most indebted developer took action to assure a capital market on edge about the spectre of the nation’s highly leveraged property sector.

The Shenzhen-based developer wired the payment due on its 8.25 per cent, US$2.03 billion bond maturing in March 2022 to Citibank on Thursday, according to separate reports by the state-run China Securities Times newspaper and Reuters, both citing unidentified sources. Evergrande did not respond to a request for confirmation while Citibank, the bond’s trustee, declined to comment.

Evergrande missed paying the coupon on September 23, and was given a 30-day grace period to comply before it was being declared in default, which could trigger cross defaults on much of its offshore debt and in the worst case set the stage for bondholders to petition for its liquidation. The developer negotiated an “off-exchange resolution on a separate 4 billion yuan (US$618 million) senior note before a separate deadline last month.

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Evergrande, with more than US$300 billion in liabilities, is hardly out of the woods, as it missed five interest payments on its offshore debt in September and October, including Thursday’s coupon payment. It has two coupon payments totalling US$235 million due on Sunday.

SCMP Graphics
SCMP Graphics

Its track record was better with onshore debt, as Evergrande made what it called its “best effort” to comply, paying the interest this week due on a 2.1 billion yuan senior note that matures in October 2025.

Evergrande, with numerous entities and publicly traded subsidiaries involved in everything from its core real estate development to electric cars, health, bottled water and even a football club, had doubled down on its negotiations to stave off a financial collapse.

Its venture Jumbo Fortune Enterprise got creditors to agree this week to an extension on the repayment of a US$260 million bond that Evergrande had guaranteed, according to REDD Intelligence, a bond information portal.

Investors cheered the coupon payment, pushing Evergrande’s shares up by as much as 7.8 per cent to an intraday high of HK$2.78 in Hong Kong, reversing yesterday’s 12.5 per cent slump when the developer’s plan to sell a unit for US$2.6 billion failed to materialise. Evergrande Property Services Group, the management unit that Evergrande withdrew from sale, rose by as much as 5.3 per cent, in contrast to the 10.2 per cent tumble when the withdrawal was announced.

Evergrande’s offshore coupon payment is a “huge boost,” as a default and a forced restructuring was widely expected by the financial markets, said Lucror Analytics’ credit analyst Zhou Chuanyi in Singapore.

Investors’ confidence over Chinese companies, particular developers, have been gravely hit by what Fantasia and Modern Land did, and now we understand that at least some Chinese companies, like Evergrande, are still trying very hard and willing to pay, shrugging [aside] its liquidity issues,” Zhou said. “The effort means something.”

Source: Northeast Securities, Tianfeng Securities, company reports. SCMP Graphics
Source: Northeast Securities, Tianfeng Securities, company reports. SCMP Graphics

Evergrande’s deteriorating finances had spilled over to other leveraged developers in China’s property industry, raising concerns among investors about the state of a sector that makes up an estimated 14 per cent of China’s economy.

Several Chinese developers, including Hong Kong-listed Sinic Holdings Group and Fantasia Holdings Group, have defaulted on their debt this month, sparking a series of downgrades in the sector by major credit rating agencies.

On Wednesday, Modern Land (China) cancelled its plan to repay a portion of a high-yield US$250 million bond and extend it just days before it was set to mature.

Hui Ka-yan (centre) chairing an undated signing ceremony with his senior executives, where they pledged to deliver China Evergrande Group’s housing projects to buyers on time, in a photograph published on 1 September 2021. Photo: Weibo.
Hui Ka-yan (centre) chairing an undated signing ceremony with his senior executives, where they pledged to deliver China Evergrande Group’s housing projects to buyers on time, in a photograph published on 1 September 2021. Photo: Weibo.

Founded by Chinese tycoon Hui Ka-yan in 1996 in Guangzhou, Evergrande has been racing to sell off assets, from properties under development to a stake in a Northeast China-based bank, to ease its liquidity crunch and repay suppliers – many who say they have not been able to get paid for months.

However, it ran into issues recently as it tried to amass enough capital to keep the lights on and complete its backlog of 1.3 trillion yuan in unfinished properties.

The company has failed to attract a buyer for a 2.2 million sq ft plot in Yuen Long that it hoped to sell at a loss and state-backed Yuexiu Property dropped its proposed US$1.7 billion offer for Evergrande’s 26-storey office tower in Wan Chai this month.

On Wednesday, Evergrande said it scrapped the sale of a controlling stake in its Hong Kong-listed property management business to China-based developer Hopson Development in a cantankerous back-and-forth between the two companies. However, Hopson left the doors open on Thursday, saying it still consider the purchase agreement legally binding.

Hui Ka-yan, also known as Xu Jiayin, during a press conference with Fabio Cannavaro, the new head coach of the Guangzhou Evergrande Football Club on November 9, 2017 in Guangzhou. Photo: Getty Images.)
Hui Ka-yan, also known as Xu Jiayin, during a press conference with Fabio Cannavaro, the new head coach of the Guangzhou Evergrande Football Club on November 9, 2017 in Guangzhou. Photo: Getty Images.)

Chinese authorities, including People’s Bank of China Governor Yi Gang, have said that they can contain the economic and financial risks associated with the Evergrande crisis, but have not stepped forward with a public lifeline for the company because of its “poor management” and that it “expanded blindly.”

The Evergrande crisis has left Chinese officials in a difficult spot as they try to balance policy efforts to control speculative pricing bubbles in the mainland property sector with the need to maintain social stability, particularly given the importance housing plays in its economy.

“We believe the mounting pressure will lead the authorities to take further measures to accelerate credit growth before the year-end, including reserve requirement ratio cuts,” Fitch Ratings analysts Andrew Fennell and Grace Wu said in a research note on Thursday. “They may also scale back the implementation of some property-related regulations.”

“The three red lines and other measures to control developer leverage may also be tempered, even while they retain rhetorical value as part of government campaigns to improve housing affordability and rein in financial risks,” they added.

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