Foreign investors are losing out in Evergrande's battle to survive

Analysis by Michelle Toh, CNN Business

October 2, 2021

Hong Kong (CNN Business)The endgame for Evergrande is still up in the air. But the troubled Chinese conglomerate is starting to get its priorities in order — and foreign investors look to be bottom of the list.

In recent days, the property giant has worked to clear some tabs with domestic lenders as it tries to sort through its $300 billion mountain of debt. But the firm has stayed silent on two interest payments to offshore investors that came due in the past two weeks.

Those interest payments were due on dollar-denominated bonds: one for $83.5 million, and the other $47.5 million. Deadlines came and went last Thursday and this Wednesday, respectively, with no official update.

That suggests that the company's priority is to pay back Chinese investors first, if it can pay them back at all. It's also under huge pressure from Beijing to protect people who bought its apartments and have not yet taken possession of them. China's real estate sector and related industries are estimated to account for about 30% of GDP, and officials want to avoid a wider crisis.

On Wednesday, Evergrande announced it had agreed to sell part of its stake in a local bank to a state-owned business for nearly 10 billion yuan (about $1.5 billion).

In a stock exchange filing, the developer said that its cash crunch had hurt the operations of Shengjing Bank "in a material way," and that the lender had demanded that all proceeds from the sale be used to resolve "financial liabilities" between the two parties.

Evergrande also recently reached an agreement on interest due on a yuan bond, saying the matter had been "settled through negotiations."

It might be some time before the company's future comes back into focus: Mainland China has just kicked off a major, week-long public holiday. But markets are open next week in Hong Kong, where Evergrande's shares and some of its bonds trade. And rumors about its fate could continue to rattle stocks.

Adam Slater, lead economist at Oxford Economics, said that investors will keep an eye out for any developments, or even rumors.

"Global markets may still react," he told CNN Business.

No sign of a 'Lehman moment'

Evergrande is China's most indebted developer, and its huge liabilities include nearly $20 billion in international bonds, according to data provider Refinitiv Eikon.
But because foreign lenders hold a "relatively small share" of Evergrande's overall debt, their losses "won't be large enough to cause any significant international contagion," said Slater.

"Imposing losses on them frees up funds to compensate domestic creditors, suppliers [or] consumers," he added.

According to Slater, the scale of the potential damage to overseas creditors "looks manageable." He estimated that they could ultimately lose about $15 billion, assuming current bond pricing "accurately reflects the ultimate recovery value of Evergrande's offshore bonds."

"This is not especially large as corporate defaults go," he noted.

In recent weeks, international investors have been swayed by fears of contagion from Evergrande and a slowdown in Chinese growth. The situation last month prompted panic in global markets, as well as large protests in China.

Some have even raised the possibility that a default by Evergrande could turn into China's Lehman Brothers moment, though many analysts say that is unlikely.
Slater said that while a collapse of Evergrande would be significant, "it's not a 'Lehman moment.'"

The priority for Chinese authorities "seems to be to prevent domestic contagion of Evergrande's problems, especially contagion that would hurt consumers and suppliers," he noted.

"Markets assume — probably correctly — that the Chinese authorities will contain the impact of Evergrande's financial woes."

Beijing has few good choices, though. It will want to protect the many Chinese people who have bought unfinished apartments from Evergrande, as well as construction workers, suppliers and small investors.

According to recent analysis from Bank of America, Evergrande has sold 200,000 housing units that have not yet been handed over to buyers.

The government will also want to limit the risk of other real estate firms going under. At the same time, Beijing has long been trying to rein in excessive borrowing by developers — and it won't want to dilute that message.

So far, experts say that potential outcomes include a Beijing-backed bailout, restructuring or default.

China moves to protect consumers

In recent weeks, the government has turned its focus to limiting fallout from the crisis and protecting ordinary people, though it has refrained from commenting on Evergrande directly.

In a statement late last month, the People's Bank of China vowed to "maintain the healthy development of the real estate market, and safeguard the legitimate rights and interests of housing consumers."

While it did not refer to Evergrande specifically, the central bank has been pumping cash into the financial system over the last few days to help stabilize the situation and calm nerves.

On Tuesday, it announced that it had added 100 billion yuan (approximately $15.5 billion) to the system, saying it was to keep liquidity going.

Iris Pang, chief economist of Greater China at ING, said that the move was "a symbolic signal to the market, that the Chinese government is in control of the incident, and is not letting the incident become a crisis."

But even if losses for overseas investors are relatively contained, the crisis could force some to rethink how they lend to other Chinese companies in the future, according to Slater.

He warned that lenders could "decide to 're-price' China [risks] in the light of their treatment in the Evergrande restructuring, and in the light of what the Evergrande problems tell them about the broader risk/ reward trade-off in Chinese debt."

"That in turn depends quite a lot on the exact way the Evergrande restructuring is organized," he added.

— CNN's Laura He contributed to this report.