Investors brace for a great fall in China By Reuters
By Marc Jones
LONDON (Reuters) – International investors that have been piling into China in recent years are now bracing for one of its great falls as the troubles of over-indebted property giant China Evergrande come to a head.
Since May, problems for the developer have spiraled out of control. A lack of resources and liabilities totalling 2 trillion yuan ($305billion) have caused the developer to lose nearly 80% in stock and bond values. The bond coupons payment for $80m is now due next week.
The future is uncertain. According to bankers, it is likely that it won’t make the payment. Instead it will be placed in a suspended animation. This allows authorities to sell assets and prevents it from getting into trouble.
Sid Dahiya is head of EM corporate bond at abrdn (formerly Aberdeen Standard), in London. He said that it will be interesting to see how things turn out.
It is possible that they are working on an agreement in the background. However, we do not have enough clarity, nor any precedents. So it’s uncharted waters.
Two weeks ago, Evergrande warned that the company could default on its debts if they don’t raise enough cash. Evergrande has maintained that these efforts have not been successful.
Analysts believe that Evergrande, which manages more than 1,300 projects across 280 cities in China, will eventually collapse. This would discredit the notion that many Chinese companies are too large to fail.
It would probably still apply to big state-linked firms of course, but it comes too after Beijing’s clampdowns on big tech firms like Alibaba (NYSE:) and Tencent wiped nearly a trillion dollars off its markets earlier in year.
Contagion from Evergrande has largely been confined to China’s other highly-indebted “high-yield” firms which have also slumped, but Hong Kong’s heavyweight also hit a 10-month low on Thursday showing there is some spread.
Global funds of major names are also involved. EMAXX data indicates that Amundi Europe, Europe’s most important asset manager was the biggest overall holder Evergrande’s international bond portfolio. It is probable it sold at least some bonds before these events turned out to be so bad.
According to EMAXX, the Paris-based firm held just $93 million on a $625m bond that was due to be repaid in June 2025. UBS Asset Managment, which held $85 millions of the issue’s total, was also the top overall holder.
Back in April those bonds were trading around 90 cents on the dollar, now they are closer to 25 cents.
Although it was always considered a risky investment with high yield, the prices tell you that today’s market is revealing that some people were surprised that the government was willing to let it go. Jeff Grills, head of emerging markets debt for U.S. funds Aegon (NYSE) said.
It was an example in which investors were lured into investing by the high interest rates offered by bonds, said Jeff Grills, head of emerging markets debt at Aegon (NYSE):
For a graphic on Evergrande’s bonds and stock prices slump as default worries mount:
According to the letter Evergrande sent to the Chinese government late last year, its liabilities involve more than 128 banks and over 120 other types of institutions.
A group of Evergrande bondholders has selected investment bank Moelis (NYSE:) & Co and law firm Kirkland & Ellis as advisers on a potential restructuring of a tranche of bonds, two sources close to the matter said.
BlackRock, the largest asset manager in the world (NYSE:), is also known to be exposed as are dozens of other funds such as PIMCO and Goldman Sachs Asset Management (NYSE:).
BlackRock, Goldman and other major U.S. banks will meet officials of China’s central banking system and its securities and banking regulators on Thursday.
Analysts in debt believe that the damage may not be as severe. Their holdings compare to that of the large investment banks. JPMorgan (NYSE) also includes only $6.75 million of nearly $20 billion Evergrande’s debt on its CEMBI index. This index is used as a sort of shopping list by large emerging market corporate debt buyers.
It sends a wider message that others are not yet comfortable with.
“This is part of a self-reinforcing dynamic in which rising insolvency risk sets off financial distress costs, which in turn increase insolvency risk,” Michael Pettis, a nonresident senior fellow at the Carnegie–Tsinghua Center for Global Policy, said on twitter.
Conditions are only going to get worse unless regulators act and address all insolvency risks across the board.
Many veteran watchers of emerging markets believe that the trouble has yet to end.
Hans Humes, EM-focused hedge fund Greylock Capital said that “this unwind hasn’t even started.”
For a graphic on Evergrande’s woe have had big knock on effect for indebted Chinese firms: