China Evergrande Heads To Default As It Misses Payment Deadline

Evergrande failed to pay $ 82.5 million in interest payments initially due Nov.6 on two rounds of dollar bonds at the end of a 30-day grace period on Monday, people close to the case. The debts were issued by a unit known as Scenery Journey Ltd.

This would likely mark his first overseas default on government bonds, after the bond trustee or investors sent the company a letter of default. Failure to pay could trigger cross-default clauses, allowing investors to report other debts in default as well. Most of Evergrande’s debt is in mainland China, but the company owns nearly $ 20 billion in international bonds and is Asia’s second-largest issuer of low-rated dollar debt.

Over the past several months, Evergrande has repeatedly avoided default by making past due interest payments on dollar bonds shortly before the end of a grace period. The company sold assets to raise funds and its founder and majority shareholder, Hui Ka Yan, also recently offloaded a large chunk of its shares, moves some creditors were hoping to be an indication that Evergrande was preparing to make its payment. Monday.

Last Friday, however, Evergrande warned it had been asked to pay $ 260 million on a debt guarantee, and said for the first time it planned to work with offshore creditors on a restructuring. On Monday, the company said its board of directors has established a risk management committee that includes representatives from several state-owned companies.

A fall in default would make Evergrande the biggest and most publicized victim in a government campaign to curb China’s real estate industry after years of rapid debt-fueled growth, which has already led several small developers to back down. their international obligations.

Nonetheless, this development is unlikely to cause much turmoil in the markets, as investors have had months to prepare. Evergrande stocks and bonds have been sold for much of this year, and the company first hired financial advisers, a sign of worsening difficulties, in September.

Beijing has also taken broader measures to offset the impact of Evergrande’s demise and larger unrest in the real estate industry. On Monday, China’s central bank said it would reduce the amount of money banks are required to set aside as reserves, freeing up funds for loans.

Local governments in some Chinese cities are also working closely with the company to limit the real impact of Evergrande’s financial difficulties and to prevent any potential social unrest. The company pre-sold around 1.4 million unfinished apartments to potential owners and worked with local authorities to restart construction that stalled several of its projects.

Evergrande is now likely to engage with creditors to draw up a restructuring plan. Investors are likely to receive much less than the face value of the debt they hold, recent market prices suggest. Some bondholders work with investment bank Moelis & Co. and law firm Kirkland & Ellis LLP.

The reorganization could be complex, given Evergrande’s size and international footprint. While most of the company’s core real estate business is in mainland China, the company is incorporated in the Cayman Islands and listed in Hong Kong, while its international obligations are governed by New York law and have in some cases been issued by a unit of the British Virgin. He is.

Evergrande’s struggles are a blow to the company’s founder, Mr. Hui, also known as Xu Jiayin in Mandarin. Just four years ago, the real estate mogul was China’s richest man, according to the Hurun Research Institute, a wealth research firm.

The debt explosion is also a milestone in China’s changing attitude to corporate failures, which were once rare but are increasingly common, both onshore and offshore. Recent failures include chipmaker Tsinghua Unigroup and formerly hyper-acquiring conglomerate HNA Group, which is currently undergoing judicial restructuring in China.

The change in stance on defaults is in part a recognition that after a huge increase in the country’s corporate debt in recent years, Beijing cannot afford too many bailouts. Chinese leaders are also keen to reduce moral hazard, or risky bets made in the belief that another party will foot the bill if things go wrong. In recent years, according to some investors, the belief that Evergrande was too big to fail has helped spark interest in the company’s debt, despite its financial aggression.

Over the weekend, a commentary published by a Chinese state news agency said the risks associated with Evergrande were now settled after many uncertainties in the market, and that was not a bad thing.

He said Evergrande strayed from the brink of default on several occasions when he made overdue interest payments, but such emergency measures could only save the company for a while. The commentary was broadcast on the state-run Xinhua News Agency and the People’s Daily, the Chinese Communist Party’s flagship media.

He added that the task force sent to Evergrande by the Guangdong provincial government, along with recent statements from financial regulators, show that the authorities “are acting to put Evergrande’s crisis management on track for a proper resolution.” And to dispel market uncertainties.

—Alexander Gladstone and Anna Hirtenstein contributed to this article.

Write to Frances Yoon at [email protected], Alexander Saeedy at [email protected] and Elaine Yu at [email protected]