China Evergrande Group sank further into equity and credit markets on Tuesday, fueling concerns about broader contagion after S&P Global Ratings said the developer is on the brink of default.
Shares of the struggling developer in Hong Kong fell as much as 7% after closing Monday at the lowest level in about a decade. Its 8.25% dollar bond due 2022 fell 0.3 cents to 24.9 cents, leaving it down 75% since the end of May, according to prices compiled by Bloomberg. The junk-rated company is the largest issuer of high-yield notes in Asia.
“We believe that Beijing would only be forced to intervene if there is a wide-ranging contagion that causes the failure of several major developers and poses systemic risks to the economy,” according to an S&P report dated September 20. in such a scenario. ”
Still, the problems could further affect investor sentiment in China’s real estate sector and junk-rated credit markets in general, the credit adviser said. The contagion has sparked a global sales wave. In Asia on Tuesday, even high-grade dollar bonds tumbled, leaving spreads set for the worst two-day expansion since April. A drop in stocks also continued, although market foci, including Hong Kong real estate stocks, rebounded after plunging on Monday.
Evergrande Chairman Hui Ka Yan told staff that he firmly believes the company will emerge from the darkest moment soon, the Securities Times reported, citing a letter from the company. The developer will speed up the full resumption of construction to ensure delivery of the buildings, it said. An Evergrande spokesperson confirmed the authenticity of the letter.
Investors are weighing up China’s policy tightening that hit the real estate sector last year through the “three red lines” effort to curb debt growth. Debate has spread about how much the government can help as markets falter, after months passed before plans emerged for China Huarong Asset Management Co., one of the country’s top managers of distressed assets.
The Evergrande saga is coming to a head at a time when liquidity is low amid the holidays in China and other Asian countries. Chinese authorities previously told major lenders not to wait for interest repayment on bank loans due this week. Interest is also due Thursday on two of the developer’s bonds.
Here are opinions on what’s next for Evergrande:
- Beijing will take steps to prevent the Evergrande crisis from becoming a “Lehman Moment” for the nation, but some banks may become victims, analysts such as Judy Zhang wrote in a note.
- “Policy makers will likely maintain the bottom line of preventing systematic risk to buy time to resolve debt risk and drive marginal easing for the overall credit environment.”
- Ajay Rajadhyaksha, head of macro research, and Jian Chang, China’s chief economist, and others at Barclays also said in a note that a possible default by Evergrande would be far from being China’s Lehman moment, although it could be a drag on the sector. real estate. .
- “We do not believe that the business model of Chinese real estate firms is completely broken,” they wrote. “Evergrande is in worse shape than most, both in terms of leverage and its business model, as seen by breaking the three ‘red lines.’
- “While we believe that the government does not want to be seen as a bailout plan, we hope it will step in to carry out a managed restructuring of the company’s debt to avoid messy debt recovery efforts, reduce systemic risk, and contain economic disruption, ”Chief Economist Tommy Wu and Asia Economists Director Louis Kuijs wrote in a note.
- However, financial conditions for the broader real estate sector will remain tense for some time, with some spillover effects on the broader financial sector stress, they said.
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