The deadline passed without a word, with no sign that the closely watched payment had been made, so investors did what they did for months to the struggling Chinese real estate giant with lots of debt and little of solutions: they sold.
China Evergrande Group shares fell nearly 12% on Friday, as Thursday’s deadline for making an $ 83 million interest payment was passed without any word from the company on whether it had met its commitments.
A bondholder, speaking on condition of anonymity to discuss the matter, said the company did not make the payment. But this default did not necessarily put the company in default. The company’s covenants give it a 30-day grace period before the missed payment results in default, the person said, meaning debt holders could face a month in limbo.
China Evergrande’s financial woes rocked global markets, although they stabilized towards the end of this week as investors accepted Beijing’s claim that it could contain any crisis.
The concern extends to landowners and policymakers in China who would face the fallout from a possible default. A constant stream of negative news from Evergrande has caused panic in the markets and raised fears of possible economic contagion – including outside China – if the company collapses. Unable to sell part of his business sprawl or raise new money from the sale of new properties, Evergrande also faces angry suppliers, homebuyers and employees, some of whom have protested. and claimed their money.
Tensions in global financial markets have eased more recently, in part when Chinese officials intervened to boost confidence – including injecting billions of dollars in capital into the country’s banking system – and also after several executives of banks and central bank officials outside of China said the impact on institutions in the United States and Europe is expected to be minimal.
On another key question for investors, whether China will directly bail out Evergrande, so far Beijing has been low key while stressing that no Chinese company is too big to fail.
This helped Evergrande say on Wednesday that it had reached an agreement with investors on a different payment due for mainland Chinese bondholders.
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Given this development, Houze Song, a researcher at the Paulson Institute in Chicago, said Evergrande would likely end up paying Thursday’s interest. He said bondholders and Evergrande could eventually strike a short-term deal that involves debt holders losing some of their exposure to Evergrande.
The fate of Evergrande and what its failure could mean for the Chinese economy has divided some of the world’s best-known investors. Billionaire investor George Soros recently claimed that a collapse of Evergrande would trigger a wider economic crash, while another billionaire investor, Ray Dalio, argued this week that an Evergrande fault was “manageable”.
Investors in dollar-denominated debt include Swiss bank UBS, asset manager BlackRock, UK bank HSBC Holdings, as well as a number of hedge funds. The bonds are linked to various private and public companies that are part of Evergrande but separate from its main real estate business, including an electric vehicle division. These companies could still have value even if the real estate industry collapses.
Despite the lingering uncertainty, equity investors appear to be expecting a better outcome from the Evergrande debacle than they did earlier in the week. On Wall Street, the S&P 500 closed more than 1% higher, recouping its steep losses from the start of the week – in part because the executives of two of Evergrande’s creditors downplayed the risk.
Ralph Hamers, Managing Director of UBS, noted at an investor conference Thursday that the bank’s direct exposure to Evergrande is “intangible,” adding its problems “haven’t kept me from sleeping at night,” according to a transcript from software company Sentieo .
Noel Quinn, chief executive of HSBC, admitted at the same conference that the challenges of Evergrande could seep further into the equity and credit markets.
“I would be naive to think that market turmoil does not have the potential to have a second and third order impact,” he said, calling Evergrande’s situation “concerning”.
A representative for BlackRock declined to comment.
Central bankers outside of China also downplayed the risk this week. Federal Reserve Chairman Jerome H. Powell on Wednesday called Evergrande’s problems “peculiar to China” during a press briefing, and on Thursday, Sam Woods, deputy governor of the Bank of England, told Reuters that the exposure of British banks and insurance companies to Evergrande is “not significant”.