What is Evergrande crisis? Why are world markets jittery over Chinese group’s likely default?

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•   • Market watchers believe Evergrande may default on payouts of US$83 million on Sept 23, 2021, on a US$2 billion, 5-year bond issue
•     • A group of investors staged a protest in front of the company’s Shenzhen HQ last week demanding immediate payouts
•     • Several top global financial institutional investors (FIIs) like HSBC, and UBS have huge holdings in Evergrande
•     • A second default may happen this month when interest payments on US$7 billion debt is due on Sept 29, 2021 

World stock markets are jittery over the likely impact of the Evergrande crisis brewing in China. Evergrande Group, the Asian nation’s second largest real estate player is expected to default on Evergrande bond domestic coupons due on Sept 21, 2021 that could trigger a disastrous ripple effect across global markets that are on the path to a fragile recovery from the COVID-19 catastrophe.

Evergrande international debt

The Shenzhen, China-based group is expected to default on pay outs totaling US$83 million on a 5-year USD-denominated bond of an initial size of $2 billion. Evergrande share price has hit the gutter falling about 50% in Hong Kong Stock Exchange, touching HK$2.27 on Sept 21, 2021, against the recent peak of HK$4.56 on Aug 25, 2021. Even more disastrous for global markets could be the Shenzhen-based company’s likely default on interest payments on US$7 billion international debt that are due on Sept 29, 2021. A host of international investors like Fidelity Asian High-Yield Fund, UBS (Lux) BS Asian High Yield (USD) and HSBC Global Investment Funds - Asia High Yield Bond XC have invested heavily in Evergrande debt.

Reuters has reported that investors staged a protest in front of Evergrande’s Shenzhen office last week demanding immediate payouts. Yields on the US$2-billion bonds, maturing in March 2022, have soared to 560% from about 10% at the beginning of the year. Interest payments on US$7-billion bond issue on Sept 29 is also equally fraught at this point in time, according to a report on CNBC. 

Evergrande stake 

“What happens on Thursday (Sept 23) promises to be a seminal event for markets, one way or the other, bigger perhaps than the FOMC outcome which will have occurred just a few hours before,” according to Ray Attrill, head of foreign exchange strategy at the National Australia Bank, as quoted  by CNBC. It will be just a technicality that the actual default would be declared only 30 days after the Sept 23 date.

Ranked 122nd on the Fortune Global 500, the Evergrande Group has developed projects in about 170 cities in China. Founded by Xu Jiayin in 1996 and incorporated in the Cayman Islands, it has the headquarters in the Houhai Financial Center in Nanshan District of Shenzhen in China’s Guangdong Province. Once the world’s largest real estate companies, Evergrande sells apartments mainly to upper and middle-income segments.

Evergrande has accumulated stake in sports (Guangzhou FC in which it shares ownership with Alibaba Group), sports coaching (Evergrande Football School, the world's largest), mineral water industry (Evergrande Spring), solar panels, pig farming, agribusiness, baby formula, heath care industry, amusement parks, and resorts.

Evergrande: ‘Not too big to fail’

A Chinese media statement that the behemoth generating 507.21 billion Chinese Yuan (US$78.4 billion) in annual revenue is “not too big to fail” has spooked the global markets further. However, some market watchers believe the government cannot afford to let Evergrande insolvency happen. They believe social unrest will force the hands of the authorities to intervene. Already, homebuyers and investors have staged demonstrations in several places. Around 100 investors turned up at Evergrande’s Shenzhen HQ, demanding payouts on overdue financial products leading to chaotic scenes, according to Reuters.

If the domestic debt gets priority over the already due international payouts, the dollar-denominated bonds may be a casualty. International FIIs that have invested in the Chinese giant are on edge about the likely priority that the domestic investors might get over the international lenders.

Evergrande debt to international funds

According to Morningstar Direct Data, the international funds that hold major stake in Evergrande include Fidelity Asian High-Yield Fund, UBS (Lux) BS Asian High Yield (USD), HSBC Global Investment Funds - Asia High Yield Bond XC, Pimco GIS Asia High Yield Bond Fund, Blackrock BGF Asian High Yield Bond Fund, and Allianz Dynamic Asian High Yield Bond. “We’ve seen a few funds adding to China Evergrande between July and August 2021, given widening spreads and attractive valuations,” CNBC quoted Patrick Ge, manager research analyst at Morningstar, as saying.