The Evergrande debt bomb test first took place this week, and investors need to keep an eye out to see if the Chinese property developer can afford the interest payments due on the bonds. According to data from S&P Global Ratings, that profit as of Thursday (September 23) was $ 83 million.

Evergrande’s five-year, dollar-denominated bond has an initial issuance of around $ 2 billion – although prices have fallen sharply this week, according to market data provider Refinitiv Eikon.

Refinitiv Eikon also said the bond’s yield rose to 560%, from more than 10% earlier this year, suggesting the risk is huge. The bonds mature in March 2022.

Evergrande 5 Year Bond Yield | Source: Refinitive Eikon

Next Wednesday, the company is also facing another interest payment on the 7-year US dollar bond.

“What happens on Thursday promises to be an important event for the market in any case, perhaps more powerful than the outcome of the FOMC meeting a few hours earlier,” said the analyst. Market analyst Ray Attrill told CNBC, referring to the Fed meeting being closely watched by investors.

Analysts and market watchers largely predict that Evergrande will be unable to make its interest payments on Thursday. Obviously, this is not the standard exit if the payment is extended within 30 days.

“There is a possibility of default,” said S&P Global Ratings on Monday.

“The truth is that Evergrande was technically insolvent because it couldn’t pay bank interest,” said Vishnu Varathan, chief economist and strategist at Mizuho Bank. He was referring to reports that the Chinese government had told major banks that Evergrande would not be able to pay interest on loans due earlier this week.

“With the high probability of not being able to pay coupons by the end of this week, the risk for the capital markets remains high. Evergrande accounts for almost 11% of all high yield bonds in all of Asia, ”Varathan wrote in a statement Tuesday.

What if you are standard?

Institutional investors and other foreign investors are likely to be more affected by default than domestic investors in China, analysts said.

Domestic Renminbi-based bonds may take precedence over US dollar bonds abroad. Foreign bonds are mainly held by foreign institutions or investors, while private investors in China are more likely to own RMB bonds.

It is likely that repayment obligations for retail investors in wealth management products will be more favorable due to the government’s preference.

Protests from home buyers and investors have erupted in several cities and social unrest is a cause for concern.

Last week, about 100 investors showed up at Evergrande’s headquarters in Shenzhen, demanding repayment of loans for overdue financial products, which wreaked havoc.

Investors flocked to the show at Evergrande headquarters

As a result, preferring domestic investors would increase the risk of default of offshore dollar bonds – held primarily by institutions or other overseas investors – versus domestic bonds held primarily by domestic investors.

“One concern, however, is whether foreign coupon bonds will mature compared to lower priority domestic bonds – especially with the asymmetric arrangement where foreign defaults do not cause cross defaults (while domestic defaults abroad cause cross defaults),” Varathan said.

Cross default is a provision in a loan or credit agreement that specifies that a borrower is deemed to be in default if he or she defaults on another debt obligation.

“In other words, would Evergrande choose not to default on foreign bonds while fulfilling its domestic obligations?” Varathan asked the question.

China cannot save Evergrande directly

According to S&P Global Ratings, the Chinese government is unlikely to step in to provide direct support to Evergrande Group.

“We don’t expect the government to support Evergrande directly. Beijing will only step in if there is a widespread contagion that causes many great developers to fail and poses systemic risks to the economy. A failure of Evergrande alone would hardly lead to such a scenario. Even at home, Evergrande is insignificant to Guangdong’s economy – so defaulting shouldn’t be too big a deal. “

Fears of a possible contagion of Evergrande in the general Chinese economy caused the Hang Seng index in Hong Kong to drop by more than 3% on Monday. The sell-off continues worldwide and is also spreading to the crypto market.

Evergrande’s total debt currently stands at $ 304 billion. S&P said the “probability of failure” is very high.

“We believe that the Chinese banking sector can prevent Evergrande from defaulting without significant disruption, although the potential impact should be monitored.”

Evergrande Shares in Hong Kong | Source: CNBC

In Tuesday morning trading, Evergrande’s shares in Hong Kong fell about 4% – a seventh straight decline, albeit far less than Monday’s more than 10% decline.

Evergrande chairman Hua Gia An attempted to reassure the market on Tuesday that he would meet his responsibilities to property buyers, investors, partners and financial institutions.

S&P analysts have compared Evergrande’s collapse to that of Chinese debt management firm Huarong, which started a market trend earlier this year when it failed to report its profits in time and collapsed its dollar-denominated bonds.

“We don’t think government action will help Evergrande unless the stability of the system is jeopardized. A government bailout would undermine the campaign to strengthen financial discipline in the real estate sector, ”S&P said.

Instead of a bailout, Beijing could ease negotiations and financing to ensure individual investors and homebuyers are “as protected as possible,” analysts say.

“The government is ready to help, but also wants events to go their way.”

Which funds currently own Evergrande bonds?

UBS, HSBC and Blackrock have amassed Evergrande bonds in the past few months, according to Morningstar Direct data. Special:

• Fidelity Asia High Return Fund
• UBS (Lux) BS Profit Asia (USD)
• HSBC Global Investment Fund – XC Asia High Yield Bonds
• Pimco GIS Asia High Yield Bond Fund
• Blackrock BGF Asia High Yield Bond Fund
• Allianz Asia High Yield Bonds

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Mr. Teacher

According to CNBC

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