Chinese regulators told real estate developer Evergrande, who is in financial distress, to focus on completing unfinished properties and paying back individual investors while avoiding a short-term default on their dollar bonds, sources tell Bloomberg.
Financial regulators in Beijing issued a wide range of instructions to the China Evergrande Group, telling the embattled developer to focus on completing unfinished properties and paying back individual investors while avoiding short-term defaults on dollar bonds.
In a recent meeting with Evergrande representatives, regulators said the company must proactively communicate with bondholders to avoid default, but did not provide more specific guidance, said a person familiar with the matter. The developer has a coupon of $83.5 million on Thursday, with a 30-day grace period to make the payment.
There is no indication that regulators have provided Evergrande with financial support for the payment of the bonds, and it is unclear whether officials believe the company should ultimately impose losses on offshore creditors. Policymakers are trying to learn more about who owns Evergrande’s bonds, the person said, asking not to be identified while discussing sensitive information.
While the regulatory guidance offers little guidance on what an Evergrande endgame might look like, it does suggest that the Chinese government wants to avoid an impending developer collapse that could shake financial markets and slow economic growth. Any sign that Beijing is taking steps to give Evergrande more time to manage its debt problems could calm the nerves of investors in China and around the world.
Fears of Evergrande’s bankruptcy have led to a sharp rise in borrowing costs for other junk-rated Chinese developers and have raised doubts about the health of some smaller Chinese banks. Individual investors, homebuyers and suppliers have staged protests at Evergrande offices across the country, as markets from Hong Kong to New York have convulsed this week as traders weighed in on the prospect of financial contagion from the world’s most indebted developer.
Even though Evergrande’s crisis can be traced in part to President Xi Jinping’s campaign to rein in over-leveraged real estate companies and discourage moral hazard, his administration is unlikely to welcome a messy default that could hurt economic and threaten social stability. Massive cash injections into the financial system by the People’s Bank of China in recent days suggest that policymakers are already focused on bolstering sentiment.
Evergrande, the PBOC and the country’s financial and housing regulators did not immediately respond to requests for comment.
Speculation that Evergrande could avoid a worst-case scenario helped boost its bonds and stocks Thursday. The company’s 8.25% dollar bill due 2022 climbed 4.8 cents on the dollar to 30 cents as of 5:39 p.m. local time, reaching session highs after Bloomberg reported regulators’ instructions to Evergrande. Bonds are still pricing in expectations of a deep haircut, but not as extreme as earlier this week. Shares rose 18% in Hong Kong ahead of the Bloomberg report, reducing this year’s loss to 82%.
The rally was fueled in part by a vaguely worded statement from Evergrande on Wednesday, in which the company said an interest payment on one of its yuan-denominated bonds “had been resolved through negotiations outside the clearinghouse.” The developer likely struck a deal with local bondholders to delay payment without having to label the move as a default, analysts said.
It is unclear whether Evergrande would be able to achieve something similar for its dollar bonds. While some of the notes are likely owned by billionaire Hui Ka Yan founder and his associates, the holders also include global investment firms that may be less willing to go along with opaque payment arrangements.
Deeply slashed prices for Evergrande dollar bonds suggest investors view some sort of restructuring as anything but inevitable. Offshore bondholders are widely seen as at the bottom of Beijing’s Evergrande creditors’ list, although that assessment may depend in part on how concerned authorities become about Chinese companies’ access to dollar funding. The turmoil at Evergrande, Asia’s largest junk bond issuer, has pushed yields on an index of junk-grade Chinese dollar bonds to a 10-year high.
In a meeting with Evergrande employees on Wednesday, Hui stressed the importance of resuming construction on unfinished properties, according to Jiemian, a Chinese media outlet. He also said that Evergrande will take care of the repayment of investment products.
Real estate sales are a major source of money for Evergrande, although the company has struggled in recent months to attract buyers while confidence in its ability to deliver projects has waned. Home buyers in China often have to make large down payments on properties that can take years. About 1.5 million buyers are currently waiting for Evergrande to deliver unfinished homes.
The company is also trying to offload assets to raise money, with varying degrees of success. It said earlier this month it had made no material progress with plans to sell stakes in its electric car and real estate services. Evergrande has hired Houlihan Lokey and Admiralty Harbor Capital to “explore all viable solutions” to alleviate its liquidity problems.
While the developer has no bonds maturing through 2022, it will face approximately $669 million in coupon payments this year. Most of the total debt of more than $300 billion goes to home buyers, suppliers and local financial institutions.
(Updates markets in eighth paragraph.)