Evergrande (EGRNY) is showing resilience, as it makes a big payment deadline that could have otherwise led to default.
But that’s no solace to aggrieved investors.
The Chinese real estate developer recently "dodged death by default for a second time ... cobbling together the cash to make a US$47.5 million coupon payment to bondholders before a grace period expired” TheStreet’s Alex Frew McMillan noted on Real Money. “Missing the 30-day grace period would have caused default across other Evergrande instruments. It has US$19 billion in offshore bonds in all.”
While Evergrande fights to live on, it's not clear where the bailout bucks are coming from. Communist leaders have told Evergrande founder Hui Ka-yan, once the richest person in Asia, to pay the company's debts out of his own pocket if need be, Bloomberg reports. “He already has used his own money to get a project completed by another developer that had issued a bond guaranteed by Evergrande,” McMillan added.
But Hui’s pockets aren’t as deep as they used to be.
“Hui was the biggest loser on the new Hurun China Rich List for 2021,” McMillan said. “His fortunes fell US$25 billion, to US$11.3 billion, sending him south from fifth place to 70th in the ranking. That drop is mainly as a result of Evergrande's nearly 84% decline in share price this year.”
Adding more fuel to the fire, ratings agency Standard & Poor's said in September that an Evergrande default is ultimately highly likely, even if the company does negotiate with its borrowers.
"We believe nonpayment risk is extremely high and could ultimately lead to debt restructuring - meaning a default scenario is a virtual certainty," S&P says.
What’s more, Beijing precipitated the current crisis.
“In August 2020, Chinese regulators introduced a policy of the "three red lines," limiting how much developers are allowed to borrow,” McMillan explained. “Developers have to maintain a liability to asset ratio of less than 70%, a net gearing ratio of less than 100%, and a cash to short-term debt ratio of more than 1x.”
Only 6% of Chinese developers could satisfy all three red lines, S&P said at the time of their introduction. “Their efforts to meet more-stringent borrowing requirements have forced them to stall their business models of building and selling projects as fast as they can to generate the cash churn necessary to get the next project off the ground,” McMillan noted.
However, he remains sanguine on the ultimate outcome. “The company is doing its level best to sustain the interests of foreign and onshore bondholders alike. Future negotiations may still lead to a haircut for those bondholders, but they should still have a full head of hair and be far from bald when it ends,” McMillan said.