Marc Jones, Andrew Galbraith

LONDON/SHANGHAI – Investors who watched China’s crisis in the property sector unfold in recent months may have lost their Evergrande grand finale. The world’s largest developer avoided a default of $19 billion, but it is possible they won’t have to wait too long.

China Evergrande Group has been experiencing woes for several months. The dwindling resources and 2 trillion Yuan ($305 billion), of liabilities has wiped out 80% this year. There are still bills to pay.

Economists worry that an implosion by the huge builder might prove impossible to stop, which could lead to other developers being displaced and making the crisis already defining the world’s second-largest economy a complete disaster.

Its decision to transfer $83.5million to cover a month’s overdue bond coupon is a temporary solution.

Himanshu Porwal from Seaport Global London, corporate credit analyst, said that “there is a positive outcome to this. They have not defaulted.”

But they’re not done. A ticking bomb is $37 trillion of short-term debt.

Evergrande must still make $195 million in overdue coupons payments. The next deadlines for avoiding default are Oct. 29th and Nov. 10th. This year’s international bond payments are due in $340m and $6.1billion next year.

A lot of small developers are already being forced to the ground. Fitch predicts that about a third (or $232 billion) of this sector’s cross-border debt will have to be refinanced before the end of next fiscal year.

It requires confidence that has almost been completely destroyed by Evergrande. The company will need to be able to quickly dispose of its assets if it is going to survive. That will be difficult.

This week, a stake sale of $2.6 billion was cancelled and plans to sell the Hong Kong headquarters were also canceled.

Hayden Briscoe from UBS Asset Management is still convinced that Evergrande’s assets have a greater value than the deteriorated bond prices at 20-27 cents per USD.

“The surprising factor in this case is actually tilted to the upside.

LEHMAN MOMENT

Omotunde Lawal is the head of emerging markets corporate debt for asset manager Barings. He said that the worst moment came when Fantasia, another large property company, went bankrupt out of nowhere.

The worst of this rout was mainly in Asia’s high-yield market, but the spread or risk premiums that investors wanted to pay for bonds from Asian property firms rocketed up to almost an unprecedented 1200 basis point.

Lawal described how it was like “we were back in a Lehman kind of moment”, referring to 2008’s financial collapse. This gives one a good sense of the extent to which capitulation was taking place and what destruction occurred in real estate.

Graphic: Evergrande would be second biggest EM corporate default https://graphics.reuters.com/EMERGING-DEFAULTS/movanjdlrpa/chart.png

GAME-CHANGER

Evergrande, which was established in Guangzhou in 1997, epitomized China’s freewheeling age of borrowing and construction. Beijing now has hundreds of new rules to end the developers’ debt frenzy, and to promote affordable housing.

Analysts think the big picture right now is Evergrande’s assets and more than 1300 real estate projects that it owns in over 280 cities. The impact this has on China’s wider property sector, which accounts for 25% of China’s economy, if it defaults or restructures.

An Evergrande-fabricated 2020 document was leaked. Analysts took it seriously, however, and showed that liabilities extended to over 128 banks as well as more than 121 institutions non-banking.

Graphic: Evergrande crisis causes major property sector bond sell off https://fingfx.thomsonreuters.com/gfx/mkt/xmvjolqqopr/Pasted%20image%201634852333461.png

Evergrande’s troubles have also rekindled the discussion about Chinese companies being too large to fail after Beijing’s crackdown on tech giants such as Alibaba. Alibaba (NYSE:) Tencent and the NASDAQ both wiped out nearly one trillion dollars from their markets in early this year.

Amundi’s Co-Head of EM Corporate & EM High Yield, Colm d’Rosario said both cases show the government’s focus is now on “common prosperity” while its acceptance of uninhibited corporate debt accumulation has changed.

Analysts believe that Evergrande’s damage might be limited. Just $6.75Billion of Evergrande’s $19B international bond debt, which accounts for less than a quarter JPMorgan (NYSE)’s $1.4Trillion CEMBI Index, a benchmark to emerging market corporate debt buyer buyers, is included.

Jeff Grills, a veteran emerging market watcher, said that if you assumed too large to fail in a high yield sector, it was not a good idea. He is the head of EM fixed income at U.S. funds Aegon Asset Management.

China’s government wanted excess risk managed and they do not want a property bubble.

According to him, while certain money managers might adjust their risk metrics in order to reduce uncertainty, this crisis should not discourage people from investing in China.

Graphic: Evergrande woes remained contained in Chinese high-yield sector https://fingfx.thomsonreuters.com/gfx/mkt/akvezajjypr/Pasted%20image%201634859714752.png