Evergrande’s problems are far from over. On October 22, Evergrande transferred $ 83.5 million in interest payments to Citibank, and before the October 23 default deadline, the payment was made to investors.
Over the past few weeks, the company has been found guilty of missing four other separate interest payments, but was confident to use the grace period to reassure investors, but the trouble doesn’t end there.
Now Evergrande faces a new test where investors and lenders hope the developer facilitates coupon payments worth $ 148.1 million for the three-dollar bonds.
The 30-day grace period for payments of these dollar obligations ends Wednesday, November 10. Evergrande had missed payments on those bonds last month, ushering in the grace period.
As was the case with its interest payments last month, investors are banking on Evergrande to make the payment at the last hour.
However, assuming the payment worth $ 148.1 million is made, the real estate group will have more payments due on its dollar bonds next month. On December 28, coupon payments worth $ 50.43 million and $ 204.77 on two separate dollar bonds are said to be due.
Failure to make the payment would pave the way for another 30-day grace period ending January 27, 2022. Additionally, in 2022 alone, Evergrande has $ 7.4 billion in maturing bonds, of which 6 billion dollars for US dollar bonds.
Evergrande is not the only real estate developer in China to risk defaults on dollar bonds, as many other groups have relied on offshore borrowing through these bonds for the past few years to grow.
Now, as Beijing’s crackdown on house prices and the slowing national economy put pressure on China’s real estate market, developers are not only struggling to sell existing inventory, but are also struggling to sell existing inventory. unable to finance the completion of projects they sold to clients.
Thus, they threaten not only the global credit markets, but also the global economy. Already, Chinese dollar bonds have lost a third of their value according to reports from Bloomberg.
However, why did Chinese real estate developers rack up so much dollar debt in the first place?
First, real estate developers make up a significant portion of China’s dollar-denominated bonds. According to Bloomberg compilations, real estate groups in China had $ 207 billion in dollar-denominated bonds outstanding, representing a quarter of total dollar-denominated bonds from China.
Evergrande alone has bonds outstanding worth nearly $ 19 billion.
However, most dollar bonds issued by Chinese real estate developers had a higher coupon rate, reflecting the higher risk, and also meaning that they are rated bad.
Still, these bonds found favor with global investors, given the portfolio diversification options they offered, negative yields from safer bonds in the US market, and the courageous bet on China’s growth.
For example, one of Evergrande’s dollar bonds offering an 8.75% coupon rate was heavily traded in the markets.
However, developer bonds offering a higher yield, or carrying more risk, are a unique characteristic of China, where real estate groups make up more than 50% of the high yield index, as compiled by Bloomberg.
The Chinese real estate market has been a story of endless growth for investors. As the country shied away from its communist characteristics in the early 2000s to develop further towards the market, investors began to bet in the real estate market, taking into account that buying a house in China was considered one of the safest investments.
Moreover, as more people were pushed out of poverty in China, investors hoped that the demand for housing would only increase, ensuring a sustained increase in house prices.
The real estate developers thought in the same direction, thus nourishing expansionist ambitions, and therefore proceeded to several rounds of table.
However, after securing bank loans locally, the developers had no choice but to look to the offshore markets. Until 2014, developers could not sell bonds in China, and even after the restrictions were lifted, the approval time and other bureaucratic processes did not make it possible to borrow quickly.
Thus, the aspirations of investors were met by the expansionist ambitions of real estate developers and a financing and refinancing cycle began, increasing from $ 675 million in annual turnover in 2009 to $ 6.47 billion in 2020. , according to Bloomberg .
Today, nearly 45% of distressed, risky-to-default or high-yielding dollar bonds are held by Chinese real estate developers.
Beijing has also recognized this problem and introduced rules to curb reckless borrowing by developers. However, developers, without the finances to cover their debts, and therefore looking to borrow more through offshore bonds, were caught off guard and now find it difficult to make coupon or interest payments.
Thus, the lack of borrowing freedom threatens not only their operations, but also their ability to repay or refinance. International credit bureaus are also taking note of these flaws.
In China, the government is not only confident in containing the damage to Evergrande, but is also confident that it will not spill over to other groups or the economy.
For Beijing, there is a greater incentive to contain the fallout from Evergrande, given that more than a quarter of its economy relies on real estate-related sectors like construction, commodities, etc.
Unlike Americans, Chinese citizens invest the majority of their savings in buying homes. Thus, if real estate developers continued to default, they would be unable to keep the commitments made to consumers, threatening social unrest or slowing consumption.
For Xi Jinping, who is seeking a third term, by extending his power as much as he can, it would be imperative to contain the fallout from the real estate sector, and the first step would be to ensure the timely payment of coupons. people like Evergrande and other developers on dollar-denominated bonds.