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Sources told Bloomberg that Chinese regulators require the capital-strapped real estate developer Evergrande to focus on completing unfinished properties and repaying individual investors, while avoiding the recent default of US dollar bonds.
Beijing’s financial regulator issued a series of broad instructions to China Evergrande Group, requiring the troubled developer to focus on completing unfinished properties and repaying individual investors, while avoiding short-term defaults on US dollar bonds.
A person familiar with the matter said that at a recent meeting with representatives of Evergrande, the regulator said that the company should actively communicate with bondholders to avoid default, but did not give more specific guidance. The developer has a $83.5 million coupon that expires on Thursday, with a 30-day grace period for payment.
There is no indication that regulators have provided financial support for Evergrande’s bond payments, and it is unclear whether officials believe the company should ultimately cause losses to overseas creditors. The person said that policymakers are trying to learn more about who holds the Evergrande bonds and asked to discuss sensitive information anonymously.
Although the regulatory guidelines provide few clues as to what the outcome of Evergrande might look like, it does show that the Chinese government wants to avoid the imminent closure of developers, which could disrupt financial markets and drag down economic growth. Any indication that Beijing is taking steps to give Evergrande more time to manage its debt problems may calm the nervousness of investors in China and around the world.
Concerns about the collapse of Evergrande have led to a sharp increase in the borrowing costs of other junk-level Chinese developers, and put the health of some small and medium-sized banks into doubt. Individual investors, home buyers, and suppliers held protests in Evergrande offices across the country, and markets from Hong Kong to New York also experienced turbulence this week as traders weighed the world’s most indebted developer Prospects for financial contagion.
Although Evergrande’s crisis can be traced to a certain extent to President Xi Jinping’s actions to curb over-leveraged real estate companies and prevent moral hazard, his government is unlikely to welcome chaotic defaults that could threaten economic and social stability. The People’s Bank of China has injected large amounts of cash into the financial system in recent days, which shows that policymakers are already focusing on boosting market sentiment.
Evergrande, the People’s Bank of China and the national financial and housing regulatory agencies did not immediately respond to requests for comment.
Speculation that Evergrande might avoid the worst-case scenario helped boost its bonds and stocks on Thursday. As of 5:39 pm local time, the company’s 8.25% US dollar bill due in 2022 rose 4.8 cents to 30 cents against the US dollar, setting an intraday high after Bloomberg reported to Evergrande the instructions of the regulator. These bonds are still priced in anticipation of sharp cuts, but not as extreme as they were earlier this week. Before the Bloomberg report was released, Hong Kong stock prices rose by 18%, reducing this year’s decline to 82%.
On Wednesday, Evergrande issued a vague statement that partly contributed to the rally. The company said in the statement that the interest payment on one of its yuan-denominated bonds had been “resolved through negotiations with the clearing house.” Analysts said that developers may reach an agreement with local bondholders to postpone payments without having to mark the move as a default.
It is unclear whether Evergrande can achieve similar goals for its US dollar bonds. Although some of these notes may be owned by billionaire founder Xu Jiayin and his colleagues, holders also include global investment companies that may be reluctant to accept opaque payment arrangements.
The heavily discounted prices of Evergrande’s US dollar bonds indicate that investors believe that some form of restructuring is almost inevitable. It is widely believed that offshore bondholders are close to the bottom of Beijing Evergrande’s creditor priority list, although this assessment may depend in part on the authorities’ concerns about Chinese companies’ access to dollar financing. The turmoil at Evergrande, Asia’s largest junk bond issuer, has pushed the yield of the junk-grade China U.S. dollar bond index to a ten-year high.
According to the Chinese media interface, at a meeting with Evergrande employees on Wednesday, Mr. Xu emphasized the importance of resuming the construction of unfinished properties. He also said that Evergrande will ensure the repayment of investment products.
Real estate sales are Evergrande’s main source of cash, although the company has been struggling to attract buyers in recent months due to weakening confidence in its ability to deliver projects. Chinese home buyers often have to pay large down payments for properties that may take years to complete. At present, about 1.5 million buyers are waiting for Evergrande to deliver unfinished houses.
The company also tried to sell assets to raise cash, but with mixed success. The company said earlier this month that its plan to sell shares in electric vehicles and property services has not made substantial progress. Evergrande has hired Houlihan Lokey and Admiralty Harbour Capital to “explore all feasible solutions” to alleviate its liquidity problems.
Although the developer does not have any bonds due before 2022, it faces about $669 million in coupon payments this year. Most of its total liabilities of more than US$300 billion are directed at home buyers, suppliers and local financial institutions.
(Update the market in the eighth paragraph.)
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