Evergrande favors domestic investors as default looms

HONG KONG – China Evergrande has announced that it will pay interest on bonds issued in the country, even as the property developer is on the verge of a dollar default, increasingly suspicious among foreign investors that ‘they will be the last line of repayment.

Hengda, Evergrande’s main unit on the mainland, said in a statement Friday night that it would pay coupons worth 121.8 million yuan ($ 19 million) on its October 2025 bond, which expires Tuesday. This contrasts with the company’s failure to meet three rounds of bond interest payments in the offshore market totaling $ 277 million since the end of September. The official deadline for the company to be declared in default arrives this week.

“Earlier this year, fearing a situation similar to what we are currently experiencing, we started selling our dollar bond exposure to Evergrande,” said a portfolio manager of a global fund. “Our hypothesis has been confirmed. Offshore creditors have the least protection in the event of Evergrande’s liquidation, and we assume that bondholders will recover around 10% of their total contributions.”

The fund manager declined to be named, citing the fund’s policy not to comment on individual companies.

While Evergrande’s approach to dealing with the biggest crisis in its two decades of existence may not shock offshore investors, it has prompted them to band together and form a creditors committee to protect their rights. Evergrande has just over $ 20 billion in offshore bonds outstanding, representing 6.7% of its total liabilities of $ 300 billion.

The apparent priority given to local bondholders over their offshore counterparts has “certainly been shocking,” said Travis Lundy, analyst at Quiddity Advisors, who publishes on the SmartKarma platform. He argues, however, that payments to onshore bondholders should be seen as a positive sign.

“The two issuers are separate. Evergrande bondholders have access to 60% of Hengda’s residual equity, not funds that remunerate bondholders,” he said with reference to the statement. participation of the developer in the unit. “Bondholders should be happy, if any, for Hengda to pay its coupons, which means Hengda shareholders are still alive.”

Evergrande, which has already missed payments to banks, retail creditors and suppliers, leading to the suspension of more than half of its 800 ongoing projects on the continent, has so far remained silent on its dollar obligations and refused to engage in any meaningful way with creditors.

Evergrande is trying to sell assets, such as its stake in its electric vehicle unit, a property management subsidiary and its head office in Hong Kong, to raise funds. However, some of these initiatives have encountered hurdles, with REDD Intelligence saying on Tuesday that a plan to sell a majority stake in Evergrande Property Services to rival Hopson Development has been put on hold. Reuters reported last week that the sale of the developer’s Hong Kong office had also failed.

The company’s shares, which have been on hold since early October, have lost four-fifths of their value this year and its offshore bonds are trading at around 20 cents on the dollar, indicating investors are certain a default or restructuring. is in progress. the horizon.

Evergrande’s creditors, by order of repayment, are households, which contributed 54% of the promoter’s financing by prepaying housing; suppliers, who represent 43% of the company’s liabilities; tracked by retail creditors who have provided funds through wealth management products; banks; and finally bonds, according to analysts.

“In total, Evergrande has many stakeholders and creditors, but not all are created equal,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis. “The offshore bondholders seem to be the last in the line.”

In addition to the government’s emphasis on protecting households and suppliers to avoid a financial panic, offshore holders have legal hurdles to overcome: Under Chinese rules, mainland companies cannot guarantee the offshore debt of their units. only after completing a registration and approval process.

To get around this requirement, some companies go into debt through an offshore vehicle, with the mainland company issuing so-called keepwell deeds – a pledge to bondholders that the parent company will ensure the solvency of the offshore vehicle. However, the structure does not guarantee reimbursement.

Evergrande started using this structure about four years ago, according to its bond issue prospectus.

Chinese courts have wide discretion as to whether or not to apply a conservation agreement, depending on the public interest.

Evergrande faces an additional $ 573 million in bond coupon payments this year and $ 7.7 billion in bond repayments next year.

Some offshore bondholders have hired law firms and advisers to protect their interests. Law firm Kirkland & Ellis and investment bank Moelis, on behalf of investors with $ 5 billion in Evergrande debt, said they contacted the developer for information on the company’s financial condition and assurances that offshore assets will not be sold while negotiations to recover bond coupons are ongoing.

Contact with Evergrande was initiated before the first missed bond interest payment, but advisers have yet to have “meaningful contact,” they said during a call with bondholders this month. this.

“What we don’t want is to have a situation where the so-called offshore assets are monetized in one way or another, and the value of those assets being disclosed to other parties, that whether it’s onshore or elsewhere, “Neil McDonald, a partner restructuring manager at Kirkland & Ellis, said on the call.