The main unit of China Evergrande Group has announced that it will make a coupon payment on its domestic bonds on schedule, easing nervous markets over fears that China’s No.
Hengda Real Estate Group said in a statement on Wednesday that it would make the coupon payment on its Shenzhen-traded 5.8 percent bond of September 2025 punctually on September 23.
The announcement comes as Evergrande, once the country’s top-selling developer, is approaching an important deadline for an interest payment on a dollar bond. “The major US investment bank went bankrupt in 2008 amid the subprime mortgage crisis.
The coupon payment from Hengda Real Estate amounts to 232 million Chinese yuan (35.88 million US dollars) according to refinitive data.
“We’re still trying to understand what that payment means for the other bonds, but I can imagine that given the close scrutiny, they will want to stabilize the market and make other coupon payments,” said a source familiar with the situation who refused , as “they are not allowed to speak to the media.
US stock futures, the yuan and the risk-sensitive Australian dollar rose, while safe havens like the yen and US Treasuries fell.
Evergrande will pay its onshore bond on time, but the developer has not disclosed whether it will be able to pay $ 83.5 million in interest on its March 2022 bond on Thursday. Another payment of $ 47.5 million is due on September 29 for the March 2024 notes.
Both bonds would default if Evergrande did not pay the interest within 30 days of the due dates.
Evergrande’s onshore exchange-traded bonds have been suspended since September 16 when Hengda Real Estate requested to suspend trading for a day. While trading was technically resumed a day later, it now only takes place through negotiated transactions, in which, according to the traders, attempts were made to contain volatility.
While worries of a chaotic collapse spilled over into markets on Monday, US stocks were flat on Tuesday and Chinese stocks fell in early trading after a two-day holiday. But China’s real estate index bounced back from losses, rising more than 3 percent, while bank stocks fell about 3 percent.
Evergrande is so closely intertwined with China’s broader economy – from retail investors to infrastructure-related companies that are a measure of global commodity demand – that fears of contagion keep financial markets in suspense.
“There have been some concerns about the possibility of contagion,” wrote analysts at Bespoke in New York in a research note on Tuesday. “But in parts of the credit markets that have served well in the past as warning signs of wider credit crises, these concerns have so far been absent.”
China’s central bank helped boost sentiment with a gross injection of short-term cash into the financial system after concerns over a debt crisis in Evergrande rocked world markets.
The People’s Bank of China (PBOC) pumped 120 billion yuan ($ 18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan ($ 13.9 billion).
“The net injection of the PBOC is intended to calm the nerves as the market worries about Evergrande,” said Eugene Leow, senior rate strategist at DBS Bank Ltd in Singapore. “Although the aim may be to impart discipline, contagion into the real economy or other sectors must also be prevented.”
The need to calm market volatility is urgent given the losses in China-related stocks worldwide in recent days amid concerns over Evergrande’s debt problems.
Evergrande failed to make interest payments to at least two of its largest bank creditors on Monday, the Bloomberg news agency reported on Tuesday, citing people familiar with the matter. The missed payments were expected after China’s housing ministry said the company would not be able to pay on time, Bloomberg said.
As investors and policymakers around the world tried to gauge the potential impact, Securities and Exchange Commission (SEC) chairman Gary Gensler said the U.S. market was in a better position to withstand a potential global shock from failure of a large corporation when it was before 2007 -2009 financial crisis.
Means to increase the position
Federal Reserve Chairman Jerome Powell is likely to be asked about the aftermath of Evergrande when speaking after the Fed’s two-day meeting, which ends Wednesday at 2 p.m. ET (1800 GMT). The Federal Reserve is commonly referred to as the Fed.
Despite the threat of default, some funds have increased their positions in recent months. Fund giant BlackRock and investment banks HSBC and UBS are among the biggest buyers of Evergrande’s debt, Morningstar data and a blog post showed.
Other bond holders are UBS Asset Management and Amundi, Europe’s largest asset manager.
In either default scenario, Evergrande, wavering between a chaotic meltdown, a managed collapse, or the less likely prospect of a Beijing bailout, will have to restructure bonds, but analysts expect a low recovery rate for investors.
S&P Global Ratings said on Monday that it assumes that the Chinese government will only act in the event of widespread contagion with systemic risks to the economy.
“I would characterize Evergrande as a wired and controlled detonation,” said Samy Muaddi, the portfolio manager of the $ 5.1 billion.
BNP Paribas, in a research report, estimated that less than $ 50 billion of Evergrande’s $ 300 billion in outstanding debt is funded by bank loans, suggesting that the Chinese banking sector will have a sufficient buffer to absorb potential bad debts.
Subsidiaries of Citigroup Inc are acting as trustee and paying agent for a China Evergrande bond that matures in March 2022 and matures on Thursday at $ 83.5 million in interest.
“We have no direct credit exposure to Evergrande; Our indirect exposure to counterparty credit risk is low and does not show a single significant concentration, ”Citigroup spokeswoman Danielle Romero-Apsilos said in an email on Tuesday. She declined to comment on Evergrande’s proposed payments.
Evergrande’s Hong Kong-listed shares fell as much as 7 percent on Tuesday after falling 10 percent the previous day amid fears that if their $ 305 billion debt collapsed, its $ 305 billion debt could cause widespread losses in the Chinese financial system could trigger. The Hong Kong Stock Exchange was closed on Wednesday for a public holiday.