China’s second-largest real estate developer still has not given any updates after missing a deadline last week to make an $83.5m coupon payment on a $2bn bond maturing in March.
According to the covenant, there is a 30-day grace period before the borrower officially defaults.
However, many asset managers believe the government is likely to facilitate an orderly default through the form of administration, rather than bail out the company.
They also believe that a default or bankruptcy of the cash-strapped firm would have a less widespread impact than the Lehman Brothers crisis in 2008, and will not cause the economic system to meltdown.
For instance, Federated Hermes expects Evergrande to file for bankruptcy in the coming weeks in the manner of a “controlled explosion”.
“We expect to see some companies asked to take over uncompleted Evergrande projects, while more banks will be instructed to extend loans to companies hit by the contagion,” said Robin Usson, credit analyst at Federated Hermes.
“Doing so will achieve two things for the government: it will avert a crisis and it will weaken the future profitability of other companies in the sector triggering a much-needed cooling effect.”
Apart from banks, Evergrande is also indebted to homebuyers and retail customers who have bought its wealth management products, and who are expected to be prioritised in the case of bankruptcy.
“China’s authorities will seek to prevent Evergrande’s troubles from hurting the company’s home-buyers, suppliers and contractors. They will prioritise retail creditors and customers, which could involve not fully adhering to creditor hierarchies,” said Michael Taylor, a Moody’s Investors Service managing director and Apac chief credit officer.
JP Morgan Asset Management’s Apac strategist Tai Hui also thinks systematic risk remains manageable as the central bank has room to step up monetary easing to deal with potential liquidity squeezes.
“There may be one or two banks that could come under stress, because they have been lending heavily to Evergrande or to developers, but not everybody, especially the big four, are as involved.”
Aftermath of Evergrande default
Although the default is unlikely to trigger a systemic event, RBC Wealth Management thinks the Chinese government will continue to have a difficult task in balancing the gradual deleveraging in the real estate sector and keeping business running.
“Even if China avoids a broad market decline, a deleveraging would not be costless. Slowing a sector that accounts for 25% of the economy represents a meaningful headwind to domestic growth; China’s importance to the world economy means any slowing there would have global implications,” the wealth manager argued.
In the long term, Manulife Investment Management expects the real estate industry to consolidate after the potential default of Evergrande, and favour developers with “decent scale and a robust financial buffer”.
“We expect accelerated industry consolidation during this period, and polarisation should deepen as stronger property developers could purchase development projects from financially weaker competitors,” said Fiona Cheung, head of global emerging markets at the firm.
Payment deadlines loom
Evergrande has another $47.5m coupon payment due on 29 September for its 9.5% notes due 2024.
In the latest development, Fitch Ratings downgraded Evergrande and its subsidiaries to C from CC yesterday citing the company has entered the 30-day grace period after a missed coupon payment.
Its recovery analysis assumes that Evergrande and its Shenzhen listed subsidiary Hengda would be liquidated in bankruptcy if Evergrande defaults.
Earlier this week, it is reported that Evergrande’s electric vehicle unit has missed salary payments to some of its employees and has fallen behind on paying equipment suppliers.
In a bid to improve liquidity, Evergrande has announced that its wholly-owned subsidiary would sell almost 20% of its stake of Shengjing Bank for a total consideration of RMB9.99bn to Shenyang Shengjing Finance Investment Group, a subsidiary of the municipal government.
