China Evergrande Bond Payment Remains Uncertain

The deadline passed without a word, with no sign that the carefully guarded payment had been made, so investors did what they had been doing for months to the ailing Chinese real estate giant with high debt and few solutions: They sold.

China Evergrande Group’s shares fell nearly 12 percent on Friday after an interest payment of $ 83 million passed on Thursday without the company being informed whether it had met its commitments.

A bondholder, who spoke on condition of anonymity to discuss the matter, said the company failed to make the payment. But this default didn’t necessarily put the company in default. The company’s debt clauses allow for a 30-day grace period before failing to pay results in default, the person said, which means debtors could be in suspension for a month.

China Evergrande’s financial troubles have rocked global markets, although they stabilized towards the end of this week as investors made Beijing’s claims that it could contain any crisis.

Concern extends to property owners and policy makers in China, who would face the consequences of a possible default. A steady stream of negative news from Evergrande has caused panic in the markets and fears of possible economic contagion – including outside of China – should the company collapse. With Evergrande unable to sell portions of its corporate sprawl or raise fresh money by selling new properties, Evergrande also faces angry vendors, home buyers and employees, some of whom have protested and asked for their money.

Tensions in global financial markets have eased recently, in part as Chinese officials stepped in to build confidence – including by pumping billions of dollars in capital into the country’s banking system – and also after several bank managers and central bank officials outside of China said the institutional impact in the United States and Europe should be minimal.

On another important question for investors, whether China will save Evergrande directly, Beijing has so far remained silent, emphasizing that no Chinese company is too big to fail.

It helped that Evergrande said Wednesday they had reached an agreement with investors on a different payment for mainland bondholders.

Business & Economy

Updated

9/23/2021, 6:27 p.m. ET

In light of this development, Houze Song, a research fellow at the Paulson Institute in Chicago, said Evergrande would likely make the interest payments on Thursday. He said the bondholders and Evergrande could ultimately reach a short-term arrangement in which the creditors would lose some of their Evergrande stake.

Evergrande’s fate and what its failure could mean for China’s economy has divided some of the world’s most famous investors. Billionaire investor George Soros recently argued that an Evergrande collapse would trigger a broader economic collapse, while another billionaire investor, Ray Dalio, argued this week that an Evergrande failure would be “manageable”.

Investors in the dollar-denominated bonds include Swiss bank UBS, asset manager BlackRock, UK bank HSBC Holdings and a number of hedge funds. The bonds are associated with various private and public companies that are part of Evergrande but that are different from the core real estate business, including an electric vehicle division. These companies could still have value if the real estate arm collapses.

Despite the ongoing uncertainty, equity investors seem to be expecting a better outcome from the Evergrande debacle than they did earlier in the week. On Wall Street, the S&P 500 closed more than 1 percent, making up for its heavy losses earlier in the week – in part because the executives of two of Evergrande’s debtors downplayed risk.

Ralph Hamers, CEO of UBS, said at an investor conference on Thursday that the bank’s direct involvement with Evergrande was “negligible,” adding that its problems “didn’t keep me up at night,” according to a transcript from the software company Sentieo .

Noel Quinn, HSBC’s chief executive officer, admitted at the same conference that Evergrande’s challenges could continue to permeate the equity and credit markets.

“I would be naive to believe that the turmoil in the market doesn’t have the potential to have second- and third-order effects,” he said, calling the Evergrande situation “related.”

A BlackRock representative declined to comment.

Central bankers outside of China also downplayed the risk this week. On Wednesday, Federal Reserve Chairman Jerome H. Powell described Evergrande’s problems as “special to China” during a press conference, and on Thursday, Sam Woods, deputy governor of the Bank of England, told Reuters that the exposures by British banks and insurance companies were following Evergrande is “not essential”.