Evergrande’s domestic bond payment deal soothes fears, for now

  • Evergrande unit says it settled a bond coupon payment
  • Investors, analysts play down threat of “Lehman moment”
  • Fed’s Powell expected to be asked about Evergrande at meeting
  • Shares rise 20% in Frankfurt; HK closed

China Evergrande Group’s (3333.HK) main unit said on Wednesday it negotiated a deal with bondholders to settle interest payments on a domestic bond, which helped calm fears of an imminent default that could unleash global financial chaos.

China’s central bank also injected 90 billion yuan ($14 billion) into the banking system, in a sign of support as the country’s financial markets reopened and steadied after a two-day break for the Mid-Autumn Festival.

Heavily indebted Evergrande is so intertwined with China’s broader economy – from retail investors to infrastructure firms that are a gauge for commodity demand – that its fate and fears of contagion have kept global stock and bond markets on tenterhooks.

Hengda Real Estate Group said in statement that it would settle the coupon payment due Thursday on its Shenzhen-traded 5.8% September 2025 bond , adding that the bond “has already been resolved through private negotiations.”

It did not provide further detail and it was unclear whether the negotiations suggested any improvement to Evergrande’s financial health or progress toward a restructure.

The company is due to pay 232 million yuan ($36 million) in interest on the bond by Thursday.

Evergrande has made no mention of an $83.5 million dollar bond interest payment also due on Thursday or $47.5 million due next week . But Hengda’s announcement seemed to stabilise broader market jitters and S&P 500 futures rose.

“We are still trying to understand what this payment means for the other bonds,” said a source familiar with the situation who declined to be identified as they are not authorised to speak to the media.

“But I imagine they would want to stabilise the market and make other coupon payments, given the close scrutiny.”

Evergrande, which epitomised the borrow-to-build business model and was once China’s top-selling developer, owes about $300 billion, mostly to onshore investors.

A peeling logo of the Evergrande Oasis, a housing complex developed by Evergrande Group, is pictured outside the construction site where the residential buildings stand unfinished, in Luoyang

Analysts have been downplaying the risk that its possible collapse threatens a “Lehman moment”, or liquidity crunch, which freezes the financial system and spreads globally. But concerns remain over the fallout if a collapse triggers a property crash in the world’s second-largest economy.

The PBOC’s cash injection suggested some official attempts to contain the crisis, said Yasutada Suzuki, head of EM investment at Sumitomo Mitsui Bank in Tokyo.

“I suspect that is to deal with any concerns about Evergrande and it shows the PBOC is trying to support the (money) market,” he said.

FED meeting

Fed Chair Jerome Powell will likely be asked about the fallout from Evergrande when he speaks at 1830 GMT after the Fed’s two-day meeting.

Despite the looming default, some funds have been increasing their positions in recent months. BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt, Morningstar data and a blog post showed.

Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager.

Since Sept. 17, Evergrande’s onshore bonds have been only tradeable through negotiated transactions, and Refinitiv data showed no trades recorded on Wednesday. Dollar bonds were steady in thin trade and its Hong Kong-listed shares did not trade due to a public holiday. Evergrande shares in Frankfurt jumped 20%.

S&P Global Ratings said on Monday it believed the Chinese government would only act in the event of a far-reaching contagion posing systemic risks to the economy.

BNP Paribas estimated less than $50 billion of Evergrande’s debt is financed by bank loans, suggesting the banking sector will have a sufficient buffer to absorb bad debts.

“I would characterise Evergrande as a telegraphed and controlled detonation,” said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, who does not have a position in the company.

Author: Anshuman Daga and Andrew Galbraith, Reuters

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