Credit: Likely policy co-ordination on Evergrande


Clock started on Evergrande’s 30-day grace period
Chang Wei Liang24 Sep 2021
    Photo credit: Unsplash Photo


    With no news that Evergrande has made payment on USD83.5m of interest for a USD bond on Thursday, the clock has started on the 30-day grace period before default is declared. Press reports suggest that policy makers are trying to learn more about the holders of Evergrande’s offshore bonds, with no firm offer of financial support yet. Furthermore, Beijing is reportedly asking local governments to prepare for a potential Evergrande failure. This suggests that an outright restructuring is not off the table, even as regulators had urged Evergrande to avoid defaults by engaging with bondholders.

    We have previously argued that investors should turn cautious on China HY credit, anticipating some spillovers from continued distress at Evergrande (see DBS Focus - China: Quick thoughts on the sell-off in equities, 28 Jul 2021). Indeed, the China HY index’s drawdown from peak has now matched the drawdown seen in the 2020 pandemic stress. HY property bonds have borne the brunt of the sell-off given Evergrande-related negativity, easing by 15% on average from the peak.

    Given the contagion seen across HY developers now, we see a case for policy co-ordination to stretch out loan and interest payments for distressed developers and lift some property curbs for non-tier 1 cities. These will be helpful for developers to deleverage via asset sales over time. As for Evergrande’s creditors, we expect policymakers to prioritize protecting home purchasers and retail investors in wealth management products. This socially driven motive could have contributed to speculation that Evergrande will be nationalized to ensure that homes are delivered.  Given the deliberate pace of Chinese policy making, the authorities may well choose to play for time by extending liquidity assistance to service interest in the grace period, considering that Evergrande has no looming USD bond maturity until March 2022.

     

    Chang Wei Liang

    Credit & FX Strategist
    weiliangchang@dbs.com
     
     
     
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