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Fears Over China’s Evergrande's Domestic Bond Payment Deal Soothes At Least For Now

Fears Over China’s Evergrande's Domestic Bond Payment Deal Soothes At Least For Now
China Evergrande Group's main unit said Wednesday that it had reached a settlement with bondholders in order to settle interest payments on a domestic debt. This helped to calm fears of a default that could cause financial chaos worldwide.
China's central bank also injected 90 billion yuan ($14 Billion) into the banking system as a sign of support. This was after the country's financial markets had been closed for two days to celebrate the Mid-Autumn Festival.
Evergrande, a heavily indebted company, is so closely linked to China's wider economy - from retail investors and infrastructure firms that gauge commodity demand – that global stock and bond markets have been on edge.
Hengda Real Estate Group stated in a statement that it would pay the Thursday coupon payment on its Shenzhen-traded 5.8% Sept 2025 bond. It also said that the bond had been "resolved through private negotiations."
It didn't provide any further details and it wasn't clear if the negotiations indicated any improvement in Evergrande’s financial health or progress towards a restructuring.
By Thursday, the company will have to pay 232 million Yuan ($36,000,000) in interest.
Evergrande did not mention the $83.5 million bond interest payment due on Thursday and $47.5 million due next Monday. However, Hengda's announcement appeared to calm market jitters. S&P 500 futures rose.
"We are still trying understand what this payment means to the other bonds," stated a source who is not authorized to talk to the media.
"But, I imagine that they would want the market to stabilize and make other coupons payments, given the close inspection."
Evergrande, the pioneer of the borrow-to build business model in China, is owed approximately $300 billion to onshore investors.
Analysts are downplaying the possibility of a collapse. This is a liquidity crunch that freezes the financial system and spreads worldwide. However, concerns remain about the consequences if the collapse causes a property crash within the second-largest country in the world.
Yasutada Suzuda, head of EM Investment at Sumitomo Mitsui Bank, Tokyo, stated that the PBOC's cash injection indicated some official attempts to manage the crisis.
He said, "I suspect it is to deal with any concerns regarding Evergrande. It shows that the PBOC wants to support the (money market)."
Some funds have increased their positions despite the imminent default. BlackRock, HSBC and UBS were the biggest buyers of Evergrande’s debt, according to Morningstar data and a blog article.
UBS Asset Management, Europe's largest asset management company, is another bondholder.
Evergrande's offshore bonds are only tradeable via negotiated transactions since Sept. 17. Refinitiv data did not show any trades on Wednesday. The dollar bonds were stable in thin trade, and the Hong Kong-listed shares didn't trade due to a holiday. Evergrande shares in Frankfurt jumped 20%.
S&P Global Ratings stated Monday that it believes the Chinese government will only take action in the case of a serious contagion that poses systemic risks to the economy.
BNP Paribas estimates that less than $50 billion Evergrande's debt was financed by bank loans. This suggests that the banking sector will be able to absorb bad debts.
Samy Muaddi (portfolio manager for the $5.1 billion T. Rowe Price Emerging Markets Bond Fund), said that Evergrande was a controlled and telegraphed detonation. He does not hold a position in the company.

Christopher J. Mitchell

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