China’s Evergrande’s shares pummelled on fear of debt default

As Evergrande scrambles to raise funds to pay off debt, regulators warn of broader risks to China’s financial system.

Shares of Evergrande on Monday plunged as much as 19 percent to their lowest in more than 11 years, extending losses as investors take a dim view of its business prospects with a fast approaching deadline for payment obligations this week.

By noon, the stock had touched 2.06 Hong Kong dollars ($0.26), the weakest level since May 2010.

The company’s property management unit dropped more than 12 percent, while its electric car unit declined 8 percent. Movie streaming company Hengten Net, majority-owned by Evergrande, plummeted 14 percent.

Evergrande has been scrambling to raise funds to pay its many lenders, suppliers and investors, with regulators warning that its $305bn of liabilities could spark broader risks to the country’s financial system if not stabilised.

One of Evergrande’s main lenders has made provisions for losses on a portion of its loans to the embattled developer, while some creditors are planning to give it more time to repay, four bank executives told Reuters news agency.

The developer said on Sunday it has begun repaying investors in its wealth management products with real estate.

Policymakers are telling Evergrande’s main lenders to extend interest payments or rollover loans, and market watchers are largely of the view that a direct bailout from the government is unlikely.

Evergrande is due to pay $83.5m interest on September 23 for its March 2022 bond. It has another $47.5m interest payment due on September 29 for the March 2024 notes. Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

In any default scenario, Evergrande will need to restructure the bonds but analysts expect a low recovery ratio for investors. Trading of the company’s bonds underscored just how dramatically investor expectations of its prospects have deteriorated this year.

The 8.25 percent March 2022 dollar bond was traded at 29.156 on Monday afternoon, yielding more than 500 percent, compared with about 13.7 percent at the beginning of the year. The 9.5 percent March 2024 bond was at 26.4, yielding more than 80 percent, compared with 14.6 percent at the start of 2021.

Goldman Sachs said last week that because Evergrande has dollar bonds issued by both the parent company and a special purpose vehicle, recoveries in a potential restructuring could differ between the two sets of bonds, and any potential restructuring process may be prolonged.

‘Paradigm shift’

The company’s woes also pressured the broader property sector as well as the yuan, which fell to a three-week low of 6.4831 per dollar in offshore trade.

Faced with uncertainty over how much economic fallout President Xi Jinping is willing to accept as he pushes forward with market-roiling campaigns to achieve “Common Prosperity” and rein in overindebted companies, many investors are choosing to sell first and ask questions later.

The Hang Seng Property Index tumbled 6.6 percent, the most since May 2020. Henderson Land dropped 12 percent. Sun Hung Kai Properties Ltd slumped 9.1 percent, poised for its biggest loss since 2016. CK Asset Holdings Ltd sank 7.9 percent.

Chinese officials told Hong Kong developers that Beijing is no longer willing to tolerate what it calls monopoly behaviour, Reuters reported on Friday. The officials did not lay out a road map or a deadline, the report said, citing unidentified developers.

“This is a paradigm shift,” said Hao Hong, chief strategist at Bocom International, referring to the Reuters report. “People need to keep a close look.”