Tuesday, October 19

China Evergrande nears interest payment deadline


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HONG KONG — China Evergrande Group has agreed to settle interest payments on a domestic bond, while the central bank injected cash into the banking system, soothing fears of imminent contagion from the debt-laden property developer.

CARLOS CASANOVA, senior economist for Asia at Union Bancaire Privee, Hong Kong

“In my opinion it shows they are closer to reaching an agreement with the government as to how they should go about this managed restructuring.

“Wealth management products are for two reasons. Of course it’s a grey area and so we don’t have visibility as to how big the risks could be in that sphere. But more importantly it has translated into quite a bit of social unrest. We ‘ve seen protesters gathering outside of Evergrande’s headquarters over the past couple of months over unpaid wealth management products.

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“And so while it’s by no means the government’s goal to send a message that returns on wealth management products are guaranteed… it is important from a social stability standpoint to make sure that Chinese retail investors get their money back and that homebuyers get their homes delivered .

“So in my opinion it signals they are closer to being in a position where they have an agreement about how they should manage the situation.”

EZIEN HOO, credit analyst at OCBC Bank in Singapore

“We think there are two parts to this: One, the nature of investors and, two, how far the investors sit from the assets.

“Assuming this situation goes the way of a debt restructuring… we think the retail investor nature of the wealth management products (WMP) would be prioritized for social stability.

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“This is especially more so as we understand that the media had reported that WMP investors also consist of employees of the company. In our view, this would be despite of the actual legal standing of the WMPs. It is still unclear to us on the exact terms of such products (for example: whether such products are outright guaranteed by Evergande’s development projects). We did not find much disclosures on the WMPs in the company’s consolidated audited financials.

“With regards to the bonds denominated in dollars (presumably this is what foreign bondholders mostly are invested in), dollar bonds are issued out of offshore entities who sit further away from the assets located in China and would be subordinated to lenders onshore. Being far from assets would mean lower bargaining power versus other lenders closer to the assets, especially lenders who have direct claims on assets.

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“Aside from this, we would imagine many of the holders of the dollar-bonds are institutional funds and exchange traded funds that are managed by sophisticated investors, where matters at Evergrande leading up to its current bout of liquidity stress has been well telegraphed for at least a few months now.”

WEI-LIANG CHANG, macro strategist at DBS Bank in Singapore

“Wealth management products are marketed to retail investors, and there is likely political pressure on the company to ensure a fair settlement. On the other hand, professional investors in the bonds are expected to have done their due diligence, and thus see no special treatment .

“The priority of creditors in a restructure should not be impacted, and will depend on the legal clauses on the bonds and wealth products.”

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BERND HARTMANN, Head CIO Office at boutique private bank VP Bank

“China’s political leadership is likely to be aware of the seriousness of the situation. The aim could be to break up the Evergrande Group. Evergrande is already selling its good bits. In this way, the government is continuing on its already chosen path of breaking up monopoly structures in the real estate market as well.

“We assume that the Chinese leadership will intervene, but attention will be paid to the exact form it takes. The authorities will try to prevent a spillover into other sectors by breaking up Evergrande to release liquidity. At the same time, Beijing is likely to try to protect private property buyers who have already paid for their flats and are making mortgage payments but are waiting for completion. The government is thus likely to ensure the completion of real estate projects.

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“A sale to private companies has already failed. It is conceivable that interventions will be made through the Guangdong provincial government instead of the central government. The greatest damage would thus fall on the creditors.

“A major impact would be a long and severe slump in property prices and sales. This must be averted. In the short term, China could deviate from its actual course of cooling the real estate market through stricter lending.”

LONG CHEN, partner at Plenum, an independent research platform, in Beijing

“China has experienced several high-profile bank failures and corporate bankruptcies over the past three years. The financial risks from Evergrande do not look much bigger than those in the failure of Baoshang Bank or HNA. Evergrande’s dollar bond is trading at below 30c so it is not a surprise at all to see a default…

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“The top task is to get the apartments built, and the government has multiple options to get that done. It is equally important to avoid a nationwide property collapse and that requires a shift of policies, which are too hawkish at the moment.

“Nobody is interested in bailing out Evergrande but nobody wants a crisis either. The moment Evergrande falls, the easier it will be for Beijing to ease policies. To put it this way: it will be more like a’whatever it takes’ moment rather than a’Lehman moment’. The market will feel more pains before that, but not after.”

($1 = 0.1547 Chinese yuan renminbi) (Reporting by Andrew Galbraith, Tom Westbrook, Anshuman Daga, Clare Jim and Cheng Leng; Editing by Christopher Cushing)

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