BERLIN, GERMANY – Newsaktuell – October 29, 2021 – For the second time in a week, China Evergrande Group has apparently technically defaulted on interest payments to international investors. This further manifests the bankruptcy of the real estate developer. The real estate group has racked up a mountain of debt totaling $ 305 billion. In the eight weeks until the end of the year alone, nearly $ 338 million in interest will be owed. If Evergrande’s insolvency drags down not just China’s real estate sector, but the country’s entire economy, we will even see the failure of major international banks, such as HSBC, fears Dr. Marco Metzler, senior analyst at DMSA.
Today ended the grace period for past-due interest of $ 47.5 million on a foreign bond issued by China’s second-largest real estate developer. But there has been no official confirmation of any payment of that interest at the close of business at Hong Kong banks. There are only unconfirmed media reports on an interest payment said to have been ordered today. However, Evergrande has not yet officially confirmed this payment. It’s no wonder, for example, that a recent Financial Times report today doubts that the money actually paid off creditors. “This is basically the same game it was a week ago,” says Dr. Marco Metzler, senior analyst at DMSA.
Even for the interest payment due on October 23 for a volume of around $ 83 million, there is still no official confirmation from investors. “Even our inquiries to affected investors since then did not bring any confirmation of the receipt of interest,” explains Dr. Marco Metzler, Senior Analyst at DMSA. (Note to editors: See also our press release of 10/25/2021) “So the bankruptcy has apparently already technically occurred,” Metzler analyzes. The developer hadn’t already provided more information on whether you can still avoid a default payment. Efforts to raise more capital have also largely failed. For example, the plan to sell a majority stake in its real estate management subsidiary.
Behind the scenes, the negotiations were hectic until the end. According to the Bloomberg news agency, Evergrande representatives met with affected bond investors in New York at 4 p.m. local time on October 28. In the talks, institutional creditors requested information on the status of real estate projects, liquidity and asset valuations, informed sources said. . The meeting ended with no official result, but with the commitment to make the interest payment. The result was published by the New York Times yesterday and picked up by the media as if the payments had already been made. However, this is not the case so far.
The developer defaulted on three rounds of coupon payments in September and October totaling nearly $ 280 million. However, in some cases, a 30-day grace period still applies. Between November 1 and December 28, a total of offshore bond coupon payments maturing with an interest volume of nearly $ 338 million.
In Dr. Metzler’s view, the Evergrande case also sheds light on Beijing: “The Chinese state is clearly not interested in rescuing the international debts of Chinese corporations.” He says this is evidenced, for example, by the fact that China’s financial market regulator called all property developers to a meeting this week and asked them to pay their international debts themselves.
And that’s where things come in: A study by rating agency Standard & Poor’s dated October 27, 2021 shows that only China’s real estate developers are required to trade $ 40 billion face value paper by the end of the year. . According to a study by Goldman Sachs, the external debts of Chinese property developers amount to about 197,000 million US dollars.
“Given these volumes and the low creditworthiness of many Chinese property developers, it is to be expected that the interest and redemption of international bonds issued by Chinese property developers will almost completely default,” Metzler warns. “Especially since there are hardly any possibilities to collect debts in China.”
It is true that since May 14, 2021 there has been an agreement between Beijing and Hong Kong (Mutual recognition and assistance in insolvency proceedings), which aims to facilitate foreign creditors the fulfillment of their asset rights even in their own China when Hong Kong companies like Evergrande falter. However, doubts are now growing as to whether this bilateral framework is sufficient to protect the claims of foreign institutional creditors in the case of Evergrande, whose holding company is incorporated in the Cayman Islands.
“The Evergrande bankruptcy case is extremely complex with a company domiciled in the Cayman Islands as the holding company and assets in China. In the end, there will be little or nothing left for the bondholders, ”predicts DMSA expert Dr. Metzler, referring to his former employer, rating agency Fitch, who had already lowered the group’s credit rating to C at the end of September. , assigning a recovery rating of RR6 for outstanding bonds. Therefore, Fitch assumes that in the event of Evergrande’s bankruptcy, only zero to ten percent of the equity invested by bond investors would be returned to them. Assuming an average return of five percent, international investors would have to immediately write off about $ 22.5 billion in the event of Evergrande’s insolvency, as Metzler demonstrated in detail in his study “The Great Reboot: Evergrande and the Final Collapse of the Financial System global ”Dated October 24, 2021. (Note to editors: this study also includes a list of Evergrande’s international creditors along with the outstanding principal amount.)
But it may not stop at $ 22.5 billion in write-offs. Meanwhile, DMSA senior analyst Metzler believes that it is quite possible that Evergrande could drag the entire Chinese real estate sector with it. This could have serious implications for major international banks like HSBC. According to its figures for the third quarter of 2021, Hong Kong’s largest bank alone has made loans totaling $ 19.6 billion to Chinese real estate groups. Assuming a five percent recovery rate in the event of an industry-wide bankruptcy wave triggered by Evergrande, HSBC alone would have to write off about $ 18 billion.
If you also consider the limited possibilities for international banks to access assets in China (see above), there is much more at stake for HSBC: the default of the entire Chinese corporate loan portfolio. And that, after all, is worth about $ 196 billion. “Such a huge loan to Chinese companies, without a guaranteed possibility of accessing collateral in China itself in the event of bankruptcy, is irresponsible in my opinion,” says financial expert Metzler. With a five percent return, HSBC would have to write off about $ 186 billion in this case. That would correspond to almost the entire share capital of the bank. And it would probably immediately lead to your bankruptcy. This would make HSBC a victim of the Chinese financial virus, which would then spread rapidly through international financial markets. “The Great Reset, the final collapse of the current global financial system, has long ceased to be a purely intellectual thought experiment,” concludes Dr. Metzler.
Find more information and the research report at www.dmsa-agentur.de
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DMSA Deutsche Markt Screening Agentur GmbH, is an independent data service that collects and assesses market-relevant information about companies, products and services. DMSA sees itself as an advocate for consumers, private customers, and savvy investors. The claim: always look at companies and suppliers, products and services through the eyes of customers. Customers are the focus of DMSA’s work. For them, the important and relevant information for decision making is grouped and presented as market projections. The goal is to create more transparency for consumers when selecting products, investments and services.