Evergrande creditors fear imminent default as advisers call for clarity

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(C) Reuters. A man walks past a No Entry traffic sign near the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021. REUTERS/Aly Song/Files

By Andrew Galbraith and Anshuman Daga

SHANGHAI/SINGAPORE (Reuters) -Chinese property developers’ bonds and shares slumped on Friday with few clues as to how local regulators propose to contain the contagion from cash-strapped China Evergrande Group that faces nearly $150 million in offshore payment obligations next week.

Evergrande, which is facing one of the country’s largest defaults as it wrestles with more than $300 billion of debt, has already missed coupon payments on dollar bonds twice last month.

Some of the offshore bondholders of Evergrande will be holding a call on Friday evening Asia time to discuss options after the company missed payments worth a combined $131 million last month, said a person familiar with the matter.

“At this point, the call is basically to get a group of bond holders together so they can negotiate better,” said the person, who declined to be named because he was not authorised to speak to the media.

“Everyone’s trying to get any information available, so they can start planning their next move.”

Bloomberg first reported that some dollar bondholders were invited by advisers to a call on Friday 0630 EST (1030 GMT) to discuss strategy.

Evergrande dollar-bond trustee Citi has hired law firm Mayer Brown as counsel, said a separate source familiar with the matter, who declined to be named due to the sensitivity of the matter. Citi and Mayer Brown declined to comment.

A group of bondholders previously selected investment bank Moelis (NYSE:MC) & Co and law firm Kirkland & Ellis as advisers on a potential restructuring of a tranche of bonds, Reuters reported last month.

The possible collapse of one of China’s biggest borrowers has triggered worries about contagion risks to the property sector in the world’s second-largest economy, as its debt-laden peers are hit with rating downgrades on looming defaults.

That uncertainty battered offshore bonds issued by property firms such as Kaisa Group, Central China Real Estate and Greenland over China’s week-long National Day break that ended on Friday.

Evergrande shares have remained suspended since it requested a trading halt on Monday pending a major transaction announcement.

The Shanghai Stock Exchange on Friday suspended trading of two bonds issued by smaller developer Fantasia Group China Co, with one dropping more than 50%, after controlling shareholder Fantasia Holdings Group missed the deadline on a $206 million international market debt payment on Monday.

“Typically, a default by a small firm will be viewed as idiosyncratic. However, given tight liquidity for many Chinese developers now, market participants are questioning if this may be a precursor for voluntary defaults by other developers with healthy short-term liquidity positions, but large unsustainable longer-term debt,” Chang Wei Liang, Credit & FX Strategist at DBS Bank, said in a note.

In a statement on Thursday evening, Fantasia Group said its operations were normal and it was maintaining close contact with investors. It also said it was “actively promoting debt service protection measures.”

CONTAGION RISK

Onshore bonds of Xiamen Yuzhou Grand Future Real Estate Development, Yango Group and Guangzhou R&F Properties also slumped on Friday.

China Aoyuan Group’s onshore bonds due March 2025 fell 8.18%, even as the company said in a statement that it had deposited funds for the payment of another onshore bond maturing Oct. 12.

Worries around Evergrande contagion also hit mainland share prices, pulling an index tracking the property sector down 1.53% on the day, against a rise of 1.31% in blue-chip shares.

In Hong Kong, the Hang Seng Property and Construction index was down 0.72% in afternoon trading versus a 0.26% gain for the broader Hang Seng index.

Chinese regulators have not made any comments specifically on Evergrande during the holiday from Oct. 1, although the central bank last Wednesday urged financial institutions to cooperate with relevant departments and local governments to maintain the “stable and healthy” development of the property market and safeguard housing consumers’ interests.

In a commentary late on Thursday, the state-backed Global Times said that authorities’ adherence to debt caps known as the “three red lines” indicated that “China has its own set of priorities and maintains the focus on deflating the real estate bubble and reducing risks.”

Investors have been waiting to hear from Evergrande after its shares were halted from trading on Monday.

Evergrande Property Services Group, a spin-off listed last year, had also requested a halt and said it referred to “a possible general offer for shares of the company.”

While a sale of assets would temporarily ease concerns around Evergrande’s cash flows, analysts also reckon the indebtedness of Evergrande and some other Chinese property firms is too large to be resolved quickly.

An index of China high-yield debt, which is dominated by developer issuers, has been sliding through the week and on Friday morning hit its lowest level in more than five years. It could soon see spreads at their widest on record.

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