Just days after Evergrande’s bonds hit new all time lows after “China’s Lehman” warned that the company with over $300 billion in debt and which many view as systematically important for China, the selloff accelerated further following news of a mini bank run as i) several key creditors demand immediate repayment and ii) as Evergrande bonds are no longer accepted as collateral.
As Bloomberg first reported last Friday, at least two of Evergrande’s largest non-bank creditors have demanded immediate repayment of some loans, adding a liquidity run to the growing insolvency strains at the world’s most indebted developer. The two creditors are trust companies which pool money from wealthy individual investors and have been a major source of “shadow” financing for Evergrande and other Chinese developers.
The trusts sent repayment notices to Evergrande over the past two months after becoming concerned about the property giant’s financial health. Trust loans often include terms that allow creditors to demand early repayment if certain conditions are met, such as sales targets, ratings downgrades or lawsuits. One of the trusts has so far received only a small portion of the money owed by Evergrande, Bloomberg reported. The size of the loans involved couldn’t immediately be learned.
The start of a bank run at Evergrande is the latest sign that China’s most indebted property developer will inevitably default on $305 billion of liabilities to banks, shadow lenders, suppliers and homebuyers unless Beijing bails it out similar to the last-minute rescue of China’s bad debt giant Huaron, which recently got a thumbs up from Beijing. However, in the case of Evergrande, so far authorities have yet to blink – despite the potentially cataclysmic consequences of a default – and as a result the developer’s bonds have plummeted to levels that suggest investors are bracing for a default.While Chinese regulators have urged the company to resolve its debt woes, the government has so far stayed silent on whether it will provide financial support.
As Bloomberg adds, “shadow” trusts have been a significant source of funding for Evergrande, accounting for about 40% of borrowings at the end of 2019, the last year the company disclosed the figures. While trust lending to developers has slowed in the past year, Evergrande has about 46 billion yuan ($7.1 billion) of such loans maturing in 2021, according to data complied by Yongyi Trust Research. About 11 billion yuan is due in the fourth quarter, and another $7.4 billion is due in 2022. And should the company survive to 2023, that’s when it gets really tough.
A failure to repay – which now appears inevitable – could prompt at least one trust to call back all its loans, though it’s unclear how Evergrande would respond. Court cases against the company and its affiliates are being centralized in Guangzhou, a city in Evergrande’s home province of Guangdong, making it more difficult for creditors to freeze assets or pursue repayment through other local courts.
However, the bank run hammering the company’s dollar bonds is just the start.
Also on Friday, Bloomberg reported that Evergrande’s yuan bonds are no longer accepted as collateral in the country’s key funding market, cutting it off from another critical source of funding – the repo market – and adding to signs of increasing default risk.
Evergrande’s notes were absent from a list of securities accepted in return for cash in so-called repurchase agreements on Shenzhen’s exchange. They also couldn’t be pledged for cash on Shanghai’s exchange, according to a notice posted by the clearing house late Friday.
The clearing house’s daily notice, which covers on-exchange transactions only, previously featured six of Evergrande’s onshore bonds for use in Shenzhen’s repo market, and three for transactions in Shanghai. Most pledged repo deals still occur in China’s interbank market, where there’s little transparency.
The move came after China’s largest credit-rating assessor cut the developer’s onshore unit to AA (the functional equivalent of a A for China’s massively grade-inflated credit rating system) from AAA – as well as nine of its yuan bonds – and put them on a watch list for potential further downgrades. That makes Evergrande bonds issued after April 2017 ineligible as collateral, according to clearing house rules, though the China Securities Depository and Clearing Corp. has the final say.
The latest set of catastrophic news for the Chinese property developer – which has been struggling to convince investors, suppliers and creditors it can generate cash to make good on liabilities after payables rose to a record – was the straw that finally broke the camel’s back and on Friday, trading in several of Evergrande’s thinly-traded onshore notes was briefly halted on Friday to steep declines, while some of its dollar debt trades below 30 cents. The shares have lost 74% this year to the lowest since July 2015.
Needless to say, the countdown to insolvency has begun even as Evergrande has been rushing to liquidate assets and raise funds – with the company’s core property business losing record amounts of money, construction on some projects halted by suppliers and freely available cash at a six-year low, the company warned of a potential default if asset-disposals fail to materialize, and reiterated plans to sell stakes in its listed electric-vehicle and property services units.
None of that will help, and at this point the collapse of Evergrande is just a matter of time and the only questions are i) whether Beijing will step in, and ii) how bad the avalanche of adverse consequences will get.