China property behemoth finds funds to avert bond payment default for now

A worker walking in front of the Evergrande headquarters in Shenzhen. Evergrande has made a key offshore interest payment a day ahead of a weekend deadline, state media said yesterday, averting a default and buying the embattled company a reprieve as it struggles under a mountain of debt.

China Evergrande Group appeared to have averted default with a last-minute bond coupon payment, a source said yesterday, buying it another week to deal with a debt crisis looming over the world’s second-biggest economy. China’s second-largest property developer sent $83.5mn to a Citibank trustee account on Thursday, the person with knowledge of the matter told Reuters, enabling it to pay interest on a US dollar bond due by October 23. That spelt relief to investors and regulators worried about fallout around global markets and added to Chinese officials’ reassurances that creditors will be protected. Still, the world’s most indebted property firm — with more than $300bn in liabilities — will need to make payments on a string of other bonds, with the next major deadline to avoid default on October 29 and little known about its capacity to pay. Evergrande did not respond to a request for comment. Citibank declined to comment. The source was not authorised to speak with media and so declined to be identified. Evergrande’s woes have been snowballing for months and its dwindling resources set against its vast liabilities have wiped out 80% of its value. Founded in Guangzhou in 1996, the developer epitomised a freewheeling era of borrowing and building. But that business model has been scuttled by hundreds of new rules designed to curb developers’ debt frenzy and promote affordable housing. The news about the remittance yesterday implies Evergrande will pay the next offshore coupon, said analyst Travis Lundy at Quiddity Advisors in Hong Kong. “There’s no point in paying this one if you fully plan on not paying the next one six days later, but given the company’s self-reported cash flow difficulties, it is not clear how long they can keep that up.” It was not clear how cash-strapped Evergrande was able to raise funds to pay the bondholders or whether any had already received the money. Evergrande now needs to find $47.5mn by October 29 and has nearly $338mn in offshore coupon payments coming up in November and December. If it fails to make next week’s payment, or any other final deadlines in the coming weeks, defaults would be triggered on all $19bn of its bonds in international capital markets. That would make it the second-biggest emerging market corporate default after Venezuela’s state-owned oil firm Petroleos de Venezuela. News of the fund transfer came a day after financial information provider REDD said Evergrande had secured more time to pay a defaulted bond it guaranteed, issued by Jumbo Fortune Enterprises. “They seem to be avoiding short-term default and it’s a bit of a relief that they have managed to find liquidity,” said a Hong Kong-based debt restructuring lawyer representing some bondholders. “This payment might be a way for them to get some sort of buy-in with stakeholders before the heavy work needed on the restructuring,” said the lawyer, who did not want to be identified. Evergrande missed coupon payments totalling nearly $280mn on its dollar bonds on September 23, September 29 and October 11, beginning 30-day grace periods for each. Evergrande’s dollar bond prices surged yesterday morning after news of the transfer, with its April 2022 and 2023 notes jumping more than 10%, data from Duration Finance showed, though they still traded at deeply distressed levels of less than a quarter of face value. Those gains evaporated yesterday afternoon in Asia, however, pushing several of the company’s other bonds down more than 6%. Evergrande’s shares rose as much as 7.8% before closing up 4.3%, but still finished a shortened week down 8.8%. Trading in its shares resumed on Thursday after a halt of more than two weeks pending the announcement of a stake sale in its property management unit, which was scrapped this week. Evergrande’s woes have reverberated across the $5tn Chinese property sector, which accounts for a quarter of the economy by some metrics, with a string of default announcements, rating downgrades and slumping corporate bonds. Still, yesterday’s news helped the Hang Seng mainland properties index rise 3.3% outperforming a 0.42% gain in the broader Hang Seng index. It also helped Evergrande’s smaller rival Kaisa Group Holdings Ltd, whose dollar bonds surged in price. Kaisa was the first Chinese developer to default back in 2015 and the Evergrande crisis has thrust it into the spotlight once again. In mainland markets, the CSI300 Real Estate index finished up 2.4%, and an index tracking the broader property sector added 2%. Asked whether it would step in to help its rival to ease its liquidity crisis, the chairman of China’s third-biggest developer, China Vanke Co Ltd, said developers needed to ensure their own safety first. “Everyone feels the chill as ‘winter’ arrives for the sector,” Chairman Yu Liang told a company forum yesterday. Any prospect of Evergrande’s demise raises questions over the more than 1,300 real estate projects it has in some 280 cities. Bank exposure to developers is also extensive. A leaked 2020 document, branded a fake by Evergrande but taken seriously by analysts, showed the company’s liabilities extending to more than 128 banks and over 121 non-banking institutions. “Given that we have little clarity on how bank financing is going for stalled real estate projects, but we know that project pre-sales are down a lot, the onshore business is unlikely to be supplying cash to Evergrande near-term,” said Quiddity’s Lundy.