For international bondholders, times are turning toward the possibility of default, and little progress has been made in engaging with embarrassed real estate developers.
The Chinese real estate giant on September 23 skipped interest payments on US$1 billion worth of bonds and gave bondholders a 30-day grace period before calling default. Evergrande did not pay coupons with its second set of dollar bonds last week. The 25-year-old company is China’s largest junk bond issuer and owes more than $19 billion in debt.
Representative of investment bank Moelis MC 0.35%
Advising a group of Evergrande Bondholders & Co. and law firm Kirkland & Ellis LLP held an online meeting Friday that was attended by hundreds of investors, including managers of hedge funds, mutual funds and major banks.
“I have had a few phone calls with my advisor, but no meaningful conversations or additional information with the company,” Moelis Managing Director Bert Grisel told hundreds of meeting attendees. “We have about two weeks left. There is an absolute urgent situation,” he said.
So far Evergrande has not been involved with bondholder advisors, according to someone familiar with the matter. Several statutory letters were sent to the company as they had missed the first bond payment. Evergrande replied this week, but said he did not provide any meaningful information.
Evergrande and its advisors – including American restructuring expert Houlihan Loki HLI -0.15%
–According to Moelis and Kirkland & Ellis, the company’s recently announced asset sale plans have not been announced. This could adversely affect the recovery outlook for international bondholders.
The price of some Evergrande dollar bonds fell from 15 cents to 25 cents a dollar. This is a level of serious distress that indicates offshore creditors are pessimistic about how much money they can recover from the company.
Evergrande reported the equivalent of more than $300 billion in debt as of the end of June. This includes interest-bearing debt of about $89 billion. Developers had recently said that due to payment problems to contractors and construction material suppliers, construction got delayed. We are also heavily indebted to Chinese employees and the individual investors who sell our investment products.
The Bondholders Committee, advised by Moelis and Kirkland & Ellis, includes global funds, asset managers and distressed investors, who put together Evergrande debt with a face value of $2.5 billion. Moelis said he is in touch with more notebook holders who have the same amount. This could bring the total estimated amount to $5 billion. One purpose of Friday’s call was to lock in support for more Evergrande bondholders.
Evergrande announced in late September that it had signed a contract with a Chinese state-owned enterprise to sell a portion of Shengjing Bank’s shares. Ltd.
According to a regulatory filing, the commercial bank demanded that Evergrande use the net proceeds from the sale of shares to repay the amount to be paid by the developer.
“This is a transaction that can be recognized as a creditor incentive,” Grisel said Friday.
Earlier this week, Evergrande’s wealth management division said it could be the subject of a takeover bid. This is another transaction that can raise cash for the parent company.
“What we don’t want is a situation where so-called offshore assets are somehow monetized and the value of those assets leaked to other parties, whether onshore or elsewhere.” Restructuring partners Neil McDonald Kirkland and Ellis said during an investor call.
McDonald said he reminded Evergrande and his advisers of the fiduciary duty to protect assets and treat creditors equally. Kirkland and Ellis said they are working with law firm Harney as part of an emergency response plan in case Evergrande fails to protect creditors’ rights.
Bond prices of several Chinese real estate developers fell after Evergrande missed interest payments, and Fantasia Holdings Group Ltd.
Another Shenzhen-based developer failed to repay a five-year $206 million bond.
Selling has picked up in the past few days as fears of rising defaults have slashed the prices of dozens of developer junk-rated bonds. Sluggish sales volume in September contributed to the malaise of the market.
Chinese real estate developer Casa Group Holdings’ 9.375% bond due in 2024 fell 28 points from the start of the week, clearing a third of its value, according to Tradeweb. Dollar bonds sold by Redson Properties Group fell 16 points this week. Yields on the ICEBofA index on Chinese high-yield bonds rose to 19.8% on Thursday, the highest in more than a decade.
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