Evergrande buys time with 11th hour offshore bond payment

Evergrande’s 11th hour $83.5 million payment to offshore bondholders today comes 24 hours before they would have fallen into default and prevents cross-default clauses across offshore bonds in the broader Chinese property market.

It is arguably an acknowledgement of the strategic importance of offshore bond markets to support the massive refinancing wall across China’s property sector next year. The payment provides a little breathing room ahead of restructuring negotiations but offshore bondholders remain the last in line of creditors.

The majority of creditors are the 1.6 million homebuyers, who have paid for homes before they are built, and Evergrande’s extensive suppliers. Many of these small Chinese suppliers face collapse if the eventual debt restructuring does not include them.

Global bond markets are watching how Beijing manages the deleveraging of its over-leveraged property sector, as the fallout will have significant implications for China’s economy, and in turn global growth.

The stakes are high. China will not allow the property sector’s problems to bleed into its banking system. Evergrande still looks to be the tip of the iceberg for property sector defaults in China, which will likely peak next year. These problems are still closer to the beginning than the end.

Future government intervention must balance protecting risks to the property sector and not negatively affect new credit and risk appetite in China, which would only exacerbate the current problems. For the moment the risks are contained, but the threat of escalation remains. Superficially, a positive development for risk assets (and crypto markets), as some tensions will ease that Chinese companies are not incentivised to meet offshore bond liabilities (as Fantasia’s bond default suggested). However, the real pain of this saga is still to come, so best keep celebrations to a minimum for now.

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