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Beijing Blinks: Will Allow Evergrande To Renegotiate Debt Terms

Beijing Blinks: Will Allow Evergrande To Renegotiate Debt Terms

Maybe it was the 3rd consecutive day in a row that Evergrande bonds were halted after furious selling amid growing concerns of imminent default…

… or maybe one of those pro-China US billionaires – such as Larry Fink and Ray Dalio – who are now engaged in discrediting George Soros for speaking out against the one true Chairman, and who still remember what happened the weekend after Lehman collapsed made a phone call to Beijing and urged them to reconsider, but whatever the reason, on Thursday China blinked and according to Bloomberg, regulators in Beijing signed off on a China Evergrande’s proposal to renegotiate payment deadlines with banks and other creditors, paving the way for a temporary reprieve as the cash-strapped developer struggles to come to grips with more than $300 billion of liabilities.

The news comes one day after REDD reported late Wednesday that Evergrande plans to suspend interest payments on loans from two banks due Sept. 21, adding that the developer asked one lender to wait for details on a proposed extension plan, suggesting the developer did that already knowing the government would back it.  Not that it will do much good of course, as Evergrande has been unable to liquidate even its prize asset – its HQ – at cost, but at least it has bought itself some time.

In any case, while Evergrande bonds were crashing in the past weeks, China’s Financial Stability and Development Committee, the nation’s top financial regulator, had already given its blessing to Evergrande’s plan last month after the property giant missed interest and principal payments on some loans, a Bloomberg source said.

Having gotten the government’s blessing, Evergrande has already contacted some banks and trusts to request deadline extensions, according to Bloomberg although it was unclear how many of those discussions – if any – have led to agreements and whether the company intends to delay payments to bondholders. As a reminder, all it takes for one creditor to balk at nonpayment for a technical event of default to have taken place.

Perhaps just as important, we learn that Evergrande’s last minute reprieve comes as the company’s main banks had discussed setting up a creditor committee as recently as last week – something that happens only when the debtor is bankrupt – but then lenders and regulators decided to give Evergrande more time to solve its liquidity crisis before taking more drastic measures. Like forcing the company into involuntary bankruptcy perhaps.

As Bloomberg notes, and as has become all too clear judging by the non-stop coverage of this company on this website, Evergrande’s intricate web of obligations to banks, shadow banks, bondholders, suppliers and homeowners has become one of the biggest sources of financial risk in the world’s second-largest economy. While China’s government has publicly urged the company to solve its debt problems, officials have yet to state explicitly whether they would allow a major debt restructuring or bankruptcy. Speculation over Evergrande’s fate has fueled outsized swings in its shares and bonds, with the latter rising from record lows on Thursday.

Even with the bounce, bond investors are pricing in a virtually certain likelihood of default. Even after Thursday’s rally, Evergrande dollar notes due next year are trading at just 27 cents on the dollar.

Still, some lenders – usually those who are state-backed and thus have no balance sheet concerns – have indicated a willingness to be flexible on payment deadlines. Bloomberg reported last month that China Minsheng Banking, China Zheshang Bank Co. and Shanghai Pudong Development Bank Co. had agreed to give Evergrande extensions on some project loans. Citic Trust, one of the developer’s biggest non-bank lenders, has given preliminary approval to a three-month extension on loans that were due in August, a Bloomberg source said.

But while Evergrande’s fate is all but sealed, the big fear is one of contagion, and whether the company’s troubles infect the broader credit market. While junk bonds trading in China have seen their yields explode to levels last seen during the depths of the March 2020 covid shutdown due to growing Evergrande concerns…

… a default will certainly push them even higher as holder of Chinese junk debt puke; as such the degree of contagion depends on the company’s ability to buy time with banks as a messy default on loans could stoke fears of widespread contagion, something Xi Jinping’s government has been keen to avoid even as it tightens financing restrictions on overstretched developers and discourages government bailouts.

So for now, Beijing blinked but it remains unclear if it will do so again when not just interest but maturities come due. And there is a lot of maturities, starting with some $7.4 billion next year and only rising from there. Indeed, the company’s borrowings totaled 716 billion yuan ($111 billion) at the end of December, with nearly half due in less than a year.

It owes about 830 billion yuan in trade and other payables to suppliers, and has received down payments on yet-to-be-completed properties from more than 1.5 million homebuyers.

Tyler Durden
Thu, 09/09/2021 – 19:40

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