SHANGHAI — With China Evergrande Group just a day away from defaulting on a dollar denominated bond, investors are focusing on three questions — what happens to the property developer’s other outstanding debt, does it cease operations after default, and will it end up in legal bankruptcy proceedings?
Evergrande, which faces more than $300 billion in liabilities, narrowly averted a default last week when it paid $83.5 million interest payment for a dollar-denominated bond just before the grace period expired on Oct. 23. Its next deadline is Oct. 29, when time runs out for a $45.2 million interest on a 2024 bonds that it should have paid on Sept. 29. It did not meet coupon payments totaling $148.2 on three bonds on Oct. 11 as well.
Advisers representing Evergrande and a group of its offshore bondholders have signed non-disclosure agreements in preparation for potential talks, Bloomberg reported citing people familiar with the development. The bondholders are seeking to exchange information with the company, including the status of various projects, liquidity and asset valuation, it said.
The developer so far has given no indication on whether it can avoid default. Its efforts to secure funds have largely failed so far with the collapse of plan to sell the majority of its property management unit, the latest.
Here we look at what happens next.
Does this mean it will default on other debt it has issued?
Foreign currency-denominated bonds often come with cross-default provisions, which means that when the borrower defaults on one, it automatically defaults on the others too. The arrangement is designed to give lenders equal rights, and could put Evergrande in default on all its outstanding dollar bonds.
However, yuan-denominated bonds issued in mainland China usually do not have cross-default provisions, so a default on a dollar bond will not affect those holders. Evergrande primary mainland unit has so far either made payments or come to an agreement with investors. This month it paid investors the equivalent of $19 million in coupon payments on time. As such yuan bondholders could still receive the interest and principal back.
Offshore-dollar bondholders have expressed frustration at the situation. But even if they were to take legal action in their home countries, “there is little they can accomplish given most of Evergrande’s assets are in China,” said a banking industry insider.
Will Evergrande have to shutter its operations?
In China, a default does not immediately force a company to shut down. Sinic Holdings failed to pay back bonds that were due to mature Monday, while Fantasia Holdings Group and China Properties Group also recently went into default. All three developers continue to operate.
Evergrande is expected to continue to try to offload assets while going about business as usual, such as continuing condominium sales. But a default will shut the door on overseas financing opportunities, meaning the company can only rely on financial institutions in China. An important question is how Chinese authorities plan to financially support the company in an increasingly difficult business environment.
Authorities in the meantime are working to calm investor fears. Despite “individual” problems in the real estate market, risks are generally “under control,” Chinese Vice Premier Liu He said at a business forum Wednesday, according to the state-run Xinhua News Agency. He reportedly expressed confidence that the crisis could be resolved.
People’s Bank of China Gov. Yi Gang has also said that spillover risks from Evergrande’s crisis were under control, though he warned the situation should not be allowed to spread to other developers and the financial system as a whole.
Will Evergrande end up in bankruptcy proceedings?
After a company defaults on a bond, the Chinese government or banks would usually lead an assessment of its assets and liabilities. Bankruptcy proceedings generally do not start until there is a rough rehabilitation plan in place. For example, HNA Group first defaulted on its bond in July 2019, but did not enter into bankruptcy proceedings until this January. Chipmaker Tsinghua Unigroup defaulted in November 2020 and began bankruptcy proceedings only this July. Its subsidiaries continue to operate.
Legally, creditors can petition courts to kick-start the process. But “the courts don’t really take action in response to unsecured creditors,” a banking source said.
The Hainan provincial government took the lead on creating a restructuring plan for HNA and moving bankruptcy proceedings forward. “For major corporations like Evergrande and HNA Group, the authorities usually intervene to ensure a soft landing,” according to an attorney who specializes in corporate rehabilitation.