- At this point of writing, Evergrande has yet to distribute the coupon payment of EVERRE 8.250% 23MAR2022 CORP (USD) that were due last Thursday (23 September). Now it has entered the 30-day grace period, which coincides with its next coupon date – Wednesday, 29 September for EVERRE 9.500% 29MAR2024 CORP (USD) and an amount of 45 million USD.
- China Evergrande has to make coupon interests payment for 5 USD bond issues (with the code EVERRE) in September and October. It is clear now that Evergrande will utilize the 30-day grace period to see if there is any further development or instructions from the government. We believe the Group will handle these coupon payments together as a whole, instead of individual repayments.
- Last week, there were news about the Chinese government advising Evergrande to avoid near-term bond default. We think that the Group is trying to prevent defaults on its public bonds if they still have cash on hand, so as to avoid a series of cross-default and legal claims to liquidate the Evergrande’s offshore assets.
- Thus, Hengda Real Estate (Evergrande’s onshore property division) announced last Wednesday (22 September) that they have resolved the coupon payment through negotiations with bondholders off the clearing house. Considering this payment method is special, we believe it is not a full cash settlement. Onshore bondholders are mainly institutional investors located in China, making negotiation talks easier. On the other hand, it would be difficult to apply a similar approach for USD bondholders who are mainly overseas fund houses, private banks, retail investors, etc.
- The attitude of Evergrande’s management towards utilizing the cash on hand is critical, and prioritizing the completion of property projects for homebuyers does not bode well for bondholders. Apart from the previous pledge-signing ceremony to promise buyers that construction would proceed, Evergrande held another internal meeting on the night of 22 September urging company executives to resume construction works and ensure the delivery of properties. Caixin also reported that authorities in areas such as Guangzhou, Zhuhai and Jiangsu have already set up special accounts to protect the funds earmarked for housing developments, and ensure the money is not diverted to creditors.
- Evergrande’s asset disposal plan is not going smoothly, as we did not see any major transactions over the last few months. On 29 September, the Group finally sold about 20% stake in Shengjing Bank to a state-owned enterprise in Shenyang for approximately 10 billion RMB. Nonetheless, the proceeds will be used to settle the relevant financial liabilities due to Shengjing Bank.
- Looking forward, the potential buyers of Evergrande’s assets are still local state-owned enterprises, but we have to understand that distressed money does not come easy. Even if any white knight appears, Evergrande should still be required to cut its existing debts first. Therefore, not all the capital injection or restructuring news are positive, and investors need to identify on their own.
- Should the bonds default, offshore bondholders will have the rights to claim against the onshore and offshore assets held by China Evergrande. However, since the onshore assets mainly comprise of the debt-distressed Hengda Real Estate, it should be harder to recover. Therefore, we still believe that the Group’s most important assets are the equity ownership of several listed companies.
- That being said, instead of a full liquidation, we still think the most possible outcome now is debt restructuring. Referencing to past cases, it usually takes one to two years for a repayment plan to be developed during the restructuring process. While Evergrande is under the spotlight and we expect creditors to be more aggressive in taking actions, investors should still take time value into consideration.
- Our team will continue to monitor the situation and provide updates. Investors who wish to know more can also read our previous updates: “Evergrande's woes deepen” and “A quick read of Evergrande’s long-awaited interim results”.
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Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in EVERRE 8.250% 23Mar2022 Corp (USD) and EVERRE 7.500% 28Jun2023 Corp (USD) and the analyst who produced this report hold a NIL position in the abovementioned securities.