FOR A COMPANY whose $300 billion of debt sent shivers through investors around the world, sketchy news that it has resolved a $36 million interest payment that was due on Monday seems more a palliative than the curative medicine investors are taking it to be.
Even though it is the equivalent of a doctor telling a patient to take two aspirins for a broken leg and see how they feel in the morning, the announcement by Hengda Real Estate, the main property unit of the world’s most indebted if no long largest real estate developer, Evergrande, that it reached an unspecified agreement with holders of one of its onshore bonds appears to have eased the pain in the financial markets.
International investors have now returned to worrying about something they at least think they understand how to worry about, inflation and stimulus unwinding. Evergrande’s financial accounting is more opaque than even central bank monetary policy.
However, the announcement said nothing about the little matter of an offshore bond on which an $84 million coupon payment falls due on Thursday, although it has a 30-day grace period.
On Monday, Evergrande reportedly missed interest payments to at least two of its biggest lenders. Authorities remain concerned about the systemic financial risk that Evergrande’s sprawling debt obligations pose if there is a disorderly collapse of the group.
They also worry about the potential spillover into the real economy, which risks social instability and thus is a political matter. The group owes $147 billion to unsecured trade creditors such as suppliers, while some 1.5 million disgruntled buyers of Evergrande homes off plan who now face losing their deposits will, at the very least, vent to let off steam, even if more serious protest will be contained.
One reason that the amount owed to trade creditors is so eye-popping is that Evergrande systematically deferred payments to its suppliers so it could cut its interest-bearing liabilities, which it succeeded in doing, reducing them by some 145 billion yuan ($22.4 billion) to 571.7 billion yuan as of end-2020..
For now, the ‘d’ word has been avoided — and authorities have the administrative tools to ensure it stays that way. That will dull the pain and provide temporary relief, if not a cure.
Update: Regulators have reportedly instructed Evergrande to focus on completing unfinished properties or repaying deposits while avoiding a near-term default on its dollar-denominated bonds. Beijing is also said to have told local officials and state-owned enterprises to step in with bail-outs only as a last resort in the even of a disorderly collapse of the property developer.