Evergrande set for restructuring, without a word about the first formal default

A residential complex by the Chinese real estate developer Evergrande in Beijing.

Noel Celis | AFP | Getty pictures

Evergrande is set to move further into a debt restructuring that will include all offshore public bonds and private debt, according to analysts.

The troubled real estate developer, flooded with $ 300 billion in liabilities, also said Tuesday that they are setting up a risk management committee, which will play a role in reducing and eliminating future risks for the company. The world̵[ads1]7;s most indebted real estate developer has struggled to raise funds to pay suppliers and investors.

This development lifted shares from a record low level, when it went back on Tuesday, although they later lost steam. Shares of other Hong Kong-listed real estate companies also rose.

Sentiment has also been strengthened by China’s movement to emphasize relief. On Monday, the country’s central bank said it would cut the reserve ratio, or the amount of cash that banks must keep as reserves, for the second time this year. It releases 1.2 trillion yuan ($ 282 billion) to boost declining growth in the midst of the pandemic.

“It seems quite likely now that a restructuring of Evergrande’s offshore public bonds and private debt obligations will soon take place,” Martin Hennecke, head of Asia investment advice and communications at St. James’s Place, told CNBC on Tuesday.

These private debt liabilities are likely to include bonds from joint venture Jumbo Fortune and unit Scenery Journey, according to Luther Chai of CreditSights, a subsidiary of Fitch Ratings.

There was still no announcement from the developer as to whether it had paid $ 82.5 million in interest – the 30-day deferral period ended on Monday. However, analysts said it was unlikely the interest rate would be paid, given the firm’s restructuring plans. Evergrande said Friday that it “plans to actively engage with offshore creditors to formulate a viable restructuring plan.”

It would be the first time that the company formally defaults in that case, as it has managed to make the last interest payments in the eleventh hour – within the deadline for the deferral period.

China is moving to political facilitation

Analysts said China’s shift to easing monetary policy would be remarkable for turning things around for the troubled real estate market.

“What is very remarkable … in my view is that the rhetoric of Chinese decision-makers has changed significantly recently, with emphasis on easing, which includes cuts in the reserve requirement, a broader easing of curbs in the real estate sector, a promise of stabilization in 2022 and focus on financial support through various monetary policy tools, “he said Hennecke.

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China’s easing is particularly significant given that it was the government’s tough stance to reduce debt and other austerity measures in the real estate sector that triggered the current crisis in the first place, Hennecke said.

“Perhaps more important than the RRR announcement, the PBOC decision was closely followed by a statement from the Communist Party’s Central Committee promising to stabilize the economy in 2022, signaling a easing of some real estate curbs,” added Rodrigo Catril, senior FX strategist at National. Australia Bank.

China’s real estate sector has been hit by the government’s move to tame debt. Evergrande’s problems came to a head after the authorities rolled out the “three red lines” policy last year. This policy sets a limit on debt in relation to a firm’s cash flows, assets and capital levels. It began to restrain developers after years of growth driven by excessive debt.

Concerns over Evergrande’s huge debt have weakened global markets due to concerns about a potential contagion effect to the rest of China’s real estate industry or even the wider economy. As the debt crisis resolved, other Chinese real estate developers began to show signs of strain – some missed out on interest payments, while others defaulted on their debt completely.

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