Sep 24, 2021 - Economy & Business

Evergrande's moment of truth

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

Evergrande, the Chinese property giant, was due to pay foreign bondholders $83.5 million Thursday as the semi-annual interest payment on its $2 billion bond due next year. It didn't.

Why it matters: This is the biggest missed coupon payment since the chaos of March 2020, and marks a key turning point in what could be one of the biggest and messiest corporate restructurings of all time.

The big picture: Missing a coupon payment doesn't automatically mean that Evergrande is in default — under the terms of the bond there's a 30-day grace period during which it can make the payment (as ordered by the Chinese government) and still be in good standing.

  • Between the lines: Given the Chinese arm-twisting, it seems fair to assume that if Evergrande had the money to make the coupon payment, it would. While the company can come to a private "resolution" with domestic bondholders, its foreign bonds are an all-or-nothing affair: Either it makes the coupon payment in full, or it's in default.
  • Flashback: The biggest missed coupon payment of last year came from Frontier Communications, which failed to make a $322 million interest payment on March 16, according to S&P. By April 15, the company had formally filed for Chapter 11 bankruptcy.

What's next: Evergrande has a hugely convoluted corporate structure, which privileges local banks over foreign bondholders. It's also acutely attuned to local political sentiment, which favors individual Chinese creditors who are owed either money or apartments or both.

  • Fixed-income analysts including Travis Lundy see little chance of a debt-for-equity swap that would give foreign bondholders a substantial stake in a restructured Evergrande.
  • The price of the 2022 bonds — they're now trading at just 29 cents on the dollar — implies that investors see not only a very high probability of default but also a very low recovery if and when the default occurs.

The bottom line: The Chinese government has a vested interest in preventing millions of its own citizens from losing money or property as a result of Evergrande collapsing. Foreign bondholders, however, are probably on their own.

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