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Sunday, January 23, 2022
Stocks & Shares

China Evergrande stocks plunge on default warning

China Evergrande

Having made three 11th-hour coupon payments in the past two months, Evergrande again faces the end of a 30-day grace period on Monday, with dues totalling $82.5 million

After lurching from deadline to deadline, China Evergrande Group is again on the brink of default, with its pessimistic comments condemning its stock to a record low just as direct state involvement raises hope of a managed debt restructuring.

Having made three 11th-hour coupon payments in the past two months, Evergrande again faces the end of a 30-day grace period on Monday, with dues totalling $82.5 million.

But a statement on Friday saying creditors had demanded $260 million and that it could not guarantee funds for coupon repayment prompted authorities to summon its chairman – and wiped a fifth off its stock’s value on Monday.

Evergrande, once China’s top-selling developer, is grappling with over $300 billion in liabilities, meaning a disorderly collapse could ripple through the property sector and beyond.

Its Friday statement was followed by one from authorities in its home province of Guangdong, saying they would send a team at Evergrande’s request to oversee risk management, strengthen internal control and maintain operations – the state’s first public move to intervene directly to manage any fallout.

The central bank, banking and insurance regulator and securities regulator also released statements, saying risk to the property sector could be contained.

Analysts said authorities’ concerted effort signalled Evergrande has likely already entered a managed debt-asset restructuring process.

Morgan Stanley said such a process would involve coordination between authorities to maintain operations of property projects, and negotiation with onshore creditors to ensure financing for project completion.

Regulators would also likely facilitate debt restructuring discussion with offshore creditors after operations stabilize, the U.S. investment bank said in a report.

After the flurry of statements, Evergrande’s stock nose-dived 20% on Monday to close at an all-time low of HK$1.82 (US$ 0.23).

Its November 2022 bond, one of two bonds that could go into default upon Monday non-payment, was trading at the distressed price of 18.560 U.S. cents on the dollar, compared with 20.083 cents at Friday close.

Evergrande has been struggling to raise capital through asset disposal, and the government has asked Chairman Hui Ka Yan to use his wealth to repay company debt.

The firm is just one of a number of developers starved of liquidity due to regulatory curbs on borrowing, prompting offshore debt defaults, credit-rating downgrades and sell-offs in developers’ shares and bonds.

To stem turmoil, regulators since October have urged banks to relax lending for developers’ normal financing needs and allowed more real estate firms to sell domestic bonds.

To free up funds, Premier Li Keqiang on Friday said China will cut the bank reserve requirement ratio ‘in a timely way.’

Still, the government may have to significantly step up policy-easing measures in the spring to prevent a sharp downturn in the property sector as repayment pressure intensifies, Japanese investment bank Nomura said in a report on Sunday.

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