Crisis-hit Chinese real estate giant Evergrande strikes deal on interest payments calming fears firm will default with $300bn debts sparking ‘Lehman moment’ global financial chaos

  • The indebted firm is heavily linked to China’s economy and has debts of $300m
  • It has negotiated a deal with bondholders to assuage fears of a collapse
  • China’s central bank also injected $14bn into banking system as show of support

Chinese real estate giant Evergrande has struck a deal to settle interest payments, calming fears the firm could default, sparking global financial chaos.

The crisis-hit company had debts of more than $300billion but it has negotiated an agreement with bondholders, while China’s central bank has pumped more money into the banking system.

The indebted firm is heavily linked to China’s broader economy and fears of contagion have kept global stock and bond markets on tenterhooks, similar to the Lehman Brothers collapse in 2008.

The announcement caused global markets to rally, with the FTSE 100 up 0.9 per cent and the Shanghai market up 0.4 per cent, although there remain doubts about the long-term health of the company. 

Evergrande has admitted facing ‘tremendous pressure’ as it tackles its mammoth debt pile, and has warned that it may not be able to meet its liabilities.

Chinese real estate giant Evergrande has struck a deal to settle interest payments, calming fears the firm could default, sparking global financial chaos

Yet founder Xu Jiayin, a billionaire once counted as Asia’s richest man, on Tuesday said the company will ‘step out of the darkest moment soon’.

In a statement to the Shenzhen stock exchange, Evergrande’s property unit Hengda said it had negotiated a plan to pay interest due on its 2025 bond, worth 232million yuan ($35.9million). 

China’s central bank also injected 90billion yuan ($14billion) into the banking system, in a sign of support as the country’s financial markets reopened and steadied after a two-day break for the Mid-Autumn Festival. 

Hengda said it would settle the coupon payment due Thursday on its Shenzhen-traded 5.8 per cent September 2025 bond, adding that the bond ‘has already been resolved through private negotiations.’

It did not provide further detail and it was unclear whether the negotiations suggested any improvement to Evergrande’s financial health or progress toward a restructure. 

The company is due to pay 232million yuan ($36million) in interest on the bond by Thursday.

The announcement caused global markets to rally, with the FTSE 100 up 0.9 per cent (pictured)

Evergrande has made no mention of an $83.5million dollar bond interest payment also due on Thursday or $47.5million due next week. 

Even if it misses the payment, the company would still have a 30-day grace period before it is deemed in default. 

But Hengda’s announcement seemed to stabilise broader market jitters and S&P 500 futures rose.

‘We are still trying to understand what this payment means for the other bonds,’ said a source familiar with the situation who declined to be identified as they are not authorised to speak to the media.

‘But I imagine they would want to stabilise the market and make other coupon payments, given the close scrutiny.’

Analysts said Wednesday’s repayment will go some way to soothing anxious markets in the short term.

But ‘for confidence to return more meaningfully, it will need the market to see sight of the broad restructuring plans for Evergrande’, Gary Dugan, chief executive officer at the Global CIO Office, told Bloomberg News.

Evergrande, which epitomised the borrow-to-build business model and was once China’s top-selling developer, owes about $300billion, mostly to onshore investors.

The Dow Jones was down 0.2 per cent but rallied from its dip earlier in the week when fears were heightened over Evergrande’s potential collapse

Analysts have been downplaying the risk that its possible collapse threatens a ‘Lehman moment’, or liquidity crunch, which freezes the financial system and spreads globally. 

But concerns remain over the fallout if a collapse triggers a property crash in the world’s second-largest economy.

The PBOC’s cash injection suggested some official attempts to contain the crisis, said Yasutada Suzuki, head of EM investment at Sumitomo Mitsui Bank in Tokyo.

‘I suspect that is to deal with any concerns about Evergrande and it shows the PBOC is trying to support the (money) market,’ he said. 

Fed Chair Jerome Powell will likely be asked about the fallout from Evergrande when he speaks at 6.30pm after the Fed’s two-day meeting.

Despite the looming default, some funds have been increasing their positions in recent months. 

BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt.

Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager.

Since September 17, Evergrande’s onshore bonds have been only tradeable through negotiated transactions, and Refinitiv data showed no trades recorded on Wednesday. 

This aerial photo taken on September 17, 2021 shows the halted under-construction Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development, in Taicang, Suzhou city

Dollar bonds were steady in thin trade and its Hong Kong-listed shares did not trade due to a public holiday. Evergrande shares in Frankfurt jumped 20%.

S&P Global Ratings said on Monday it believed the Chinese government would only act in the event of a far-reaching contagion posing systemic risks to the economy.

BNP Paribas estimated less than $50 billion of Evergrande’s debt is financed by bank loans, suggesting the banking sector will have a sufficient buffer to absorb bad debts.

‘I would characterise Evergrande as a telegraphed and controlled detonation,’ said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, who does not have a position in the company

While predominantly a developer, Evergrande – which employs 200,000 people, has a presence in more than 280 cities and claims to indirectly generate 3.8million Chinese jobs – has been on a buying spree for more than a decade.

The company has hired experts including financial services firm Houlihan Lokey – which advised on the restructuring of Lehman Brothers when it went under during the global financial crisis – as it tries to avoid a collapse.

State regulators have also dispatched a team of financial advisers to assess the company, according to reports.

News of the deal provided support to equities Wednesday, with Shanghai leading most Asian markets up, even as traders returned from a long weekend break to play catch up with Monday’s global rout.

The Shanghai market closed 0.40 per cent higher on Wednesday although Shenzhen crept down 0.25 per cent.

Abdul Abiad, director of macroeconomic research at the Asian Development Bank, told reporters at a virtual briefing that China’s ‘banking system’s capital buffers are strong enough to absorb a shock even of Evergrande’s size, should it materialise’.

This week the central bank pumped some $14billion into financial markets to soothe worries about a potential liquidity squeeze off the back of the Evergrande crisis.

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