Evergrande moment of truth arrives with bond payment deadlines

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(Bloomberg) – Bondholders of the China Evergrande group are on the verge of whether the real estate giant’s liquidity squeeze is as bad as it looks.

Interest payments on two Evergrande notes fall due Thursday, a key test of whether the developer will continue to meet its obligations to bondholders even if it falls behind on payments to banks, vendors and retailers. holders of onshore investment products. Investors rate a high probability of default, with one of the Notes trading below 30% of its face value.

Concerns about Evergrande’s ability to honor its $ 300 billion in liabilities are spreading across Chinese financial markets. Shares of other real estate companies plunged, while the return on a junk dollar-denominated bond index climbed to about 14%, the highest in nearly a decade. The People’s Bank of China on Friday injected $ 14 billion in short-term liquidity into the financial system, a sign that policymakers want to ease the nerves.

Evergrande’s payments due Thursday include $ 83.5 million in interest on an 8.25% five-year dollar bond, according to data compiled by Bloomberg. There is a 30 day period before a missed payment is considered a default, according to the covenants of the obligation. Evergrande is due to pay a 232 million yuan ($ 36 million) coupon on an onshore bond the same day.

In total, Evergrande has $ 669 million in coupon payments due until the end of this year. Some $ 615 million is spent on dollar bonds, according to data compiled by Bloomberg. Fitch Ratings signaled the heightened risk of payment failure this month when it downgraded the company’s credit rating even deeper into junk territory, citing the risk of “likely” default.

Evergrande is also expected to pay interest on bank loans on Monday, with a one-day grace period. Monday and Tuesday are public holidays in China. Although details of how much owed are not publicly available, Chinese authorities have already told major lenders not to expect a refund, people familiar with the matter said last week. Evergrande and the banks are discussing the possibility of extensions and renewals of some loans, the people said.

Bond investors are rushing for professional help as a potential restructuring for Evergrande is getting closer to reality. Addleshaw Goddard has engaged with some of the company’s bondholders and is preparing to establish a creditors committee to negotiate with Evergrande, according to a person familiar with the matter.

Evergrande’s debt pile includes around 571.8 billion yuan in loans from banks and other financial institutions such as trusts, with 240 billion yuan within a year. The average cost of borrowing was 9.02% as of June 30. A portion of Evergrande’s borrowings is guaranteed by a pledge of its buildings and equipment, land use rights, cash held in banks and holdings of certain subsidiaries.

China Minsheng Banking Corp., Agricultural Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. were among the developer’s top banks at the end of last year.

Whether or not selling Evergrande bonds drives the broader credit market may depend on the company’s ability to buy time with banks. A messy default on loans could fuel fears of widespread contagion, something Xi Jinping’s government has been keen to avoid even as it tightens funding restrictions on overwhelmed developers and discourages government bailouts.

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