Evergrande prioritizing domestic creditors over foreign ones

According to sources familiar with the matter at hand, China Evergrande’s offshore bondholders have yet to receive their due coupon payment by the close of Asia business on Wednesday, despite the cash strapped Chinese developer reaching a $1.5 billion debt settlement deal with a Chinese bank.

Straddled with liabilities of $305 billion, Evergrande’s woes have sparked concerns that it will ripple through and have deep lasting impact on not only China’s financial system but also around the globe.

Evergrande, which has around $20 billion in offshore debt, was due to make a $47.5 million bond interest payment on its 9.5% March 2024 dollar bond on Wednesday, which it missed. It also missed paying a $83.5 million payment on another bond last week.

“Some of the holders of the 2024 bonds had received no information from Evergrande about the payment on Wednesday”, said sources familiar with the matter at hand on the condition of anonymity given the sensitivity of the matter.

Evergrande’s spokesperson did not immediately respond to requests for comments.

The Chinese company’s cryptic silence on its offshore payment obligations have cast a massive shadow with global investors wondering if they will be forced to write off losses when the 30-day grace periods end for coupons which are due on September 23 and September 29.

The Chinese company has prioritized domestic creditors over offshore bondholders.

For Evergrande, “the most likely outcome is debt restructuring with some help from the government,” said Wai Hoong Leong, portfolio manager for the KraneShares Asia Pacific High Yield Bond ETF, in a presentation to investors. He went on to add, “We expect the government and Evergrande to focus on protecting the customers and suppliers, while ensuring an orderly restructuring for creditors who are likely to take a larger impact.”

Earlier on Wednesday, in a stock exchange filing Evergrande said, it would sell its $1.5 billion (9.99 billion yuan) stake in Shenging Bank Co Ltd to a Chinse state-owned asset management company.

The bank, one of Evergrande’s main lenders, demanded all net proceeds from the sale go towards settling the developer’s debts with Shengjing.

As of the first half last year, the bank had 7 billion yuan in loans to Evergrande, according to a report by brokerage CCB International, citing news reports. The development marks the role state-owned enterprises may potentially play in Evergrande’s denouement.

“We are in the wait-and-see phase at the moment. The creditors are organizing themselves and people are trying to figure out how this falling knife might be caught,” said an adviser hired by one of the offshore Evergrande bondholders. “The clock has started to tick on a restructuring process. The company is going to need to do something, it’s obviously struggling with liquidity … the liquidity issue is what brings the house of cards down.”

Last week, rating agency Fitch has already downgraded the long-term foreign-currency issuer default ratings (IDRs) of Evergrande and its subsidiaries, Hengda and Tianji, citing likely nonpayment of offshore bond interest. Earlier this week on Monday, China’s central bank said it aims to protect Chinese consumers exposed to the housing market but did not name Evergrande in its statement posted on its website; it has also injected more cash into the banking system.

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