Evergrande Remains Mum on $83.5B Bond Payment, China Steps in to Ensure Cash Flow is Used to Complete Housing Projects

Another day, another Evergrande debacle.

Despite vaguely reassuring markets earlier this week that it had come to an agreement with creditors regarding a renminbi-denominated bond payment, offshore bondholders are still sitting in the dark.

The other, more closely watched offshore bond payment sits to the tune of $83.5 million, and was also due Thursday at midnight New York time, or noon on Friday in Hong Kong. However, bondholders have yet to receive any money, and Evergrande has yet to issue a statement regarding the repayment, meaning that the 30-day grace period before a default is officially declared has now commenced.

The offshore bond in question has disintegrated as markets fear even more uncertainty over what could morph into the largest restructuring process in Chinese history. Evergrande’s other notes also collapsed even lower on Friday to around 30 cents, while the company’s stock plummeted by more than 13%, bringing its combined losses to over 80% since the beginning of the year. Evergrande’s electric car business is also on the brink of collapse, and has stopped paying its staff and factory equipment suppliers, according to Bloomberg which cited people familiar with the matter.

But, to make matters worse for creditors, Bloomberg also revealed that China’s Ministry of Housing and Urban-Rural Development has ramped up its oversight of Evergrande’s bank accounts, in order to ensure that any remaining liquidity is diverted to finishing housing projects rather than debt holders.

The housing regulator has instructed its various subsidiaries across China to ensure that any funds in Evergrande’s bank accounts are allocated to dedicated escrow accounts that will prioritize construction of current housing projects. Moreover, before any payments can be withdrawn from the designated accounts— such as payments for building supplies— they must first be approved by the state.

Such a move is certainly puzzling, because making payment arrangements for operational outlays ahead of payments to creditors typically occurs only after the company in question has filed for bankruptcy. Indeed, the latest move suggests that Chinese homeowners are first on the priority list rather than creditors, banks, and bondholders, as the Chinese government attempts to prevent a complete collapse of its property sector.

In the meantime, it appears that Credit Suisse has learned from its previous embarrassing disasters with Archegos and Greensill, and was able to breathe a huge of sign of relief this month, after learning that not only was it not exposed to the Evergrande mess, but that it had liquidated its positions in late 2020.

“Risk procedures actually worked then… [but] it was a warning signal about the kind of deals that were being brought in” by bankers and wealth managers in Asia, people familiar with the matter told the Financial Times. Credit Suisse has spent ten years organizing $4.6 billion worth of dollar-denominated bonds for Evergrande, but refrained from underwriting any new new debt in the past two years due to elevated concerns over the real estate company’s financial position.

Of the $4.6 billion in bonds issued by Credit Suisse and sold to numerous hedge funds, private clients, and asset managers, $4.2 billion still remain outstanding. However, the bank made the move to liquidate its own residual exposure of Evergrande, which was compiled during the underwriting process. On Thursday, the Swiss-based bank announced to its clients and investors that it held only a minuscule portion of Evergrande’s $300 billion debt pile, adding that it “is not an existing lender to Evergrande and we have no direct lending exposure to the company.”

Whew, what a sign of relief— at least for Credit Suisse. In the interim, chaos surrounding Evergrande continues, as authorities struggle to preserve social order after angry retail investors enveloped the company’s headquarters in Shenzhen for three consecutive days. Meanwhile only crickets can be heard from Evergrande on its now-overdue $83.5 billion bond payment.

Information for this briefing was found via the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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