Chinese developer, Evergrande, could default $83 million interest payment

By: Ruchi Gupta
Ruchi Gupta
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on Sep 21, 2021
  • Evergrande expected to pay bond interest of $83 million on Friday
  • Analyst and market watchers expect the Chinese developer to miss the Thursday payment
  • Dollar-denominated foreign bonds to be impacted more if Evergrande defaults

Evergrande’s (HKG: 3333) first test for its debt issue will happen this week as investors will be keen to see if the beleaguered property will pay or defaults its bond interest. According to S&P Global Rating, the Chinese company is expected to pay $83 million in bond interest on Thursday.

Evergrande expected to pay interest in a 5-year US dollar-denominated bond

According to market data source Refinitiv Eikon, the developer’s 5-year, US-dollar denominated bond had an original issuance size of roughly $2 billion — albeit the price has since dropped. Interestingly another 7-year US dollar bond interest payment is expected next week on Wednesday. National Australia Bank head of foreign exchange Ray Attrill told CNBC:

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“What happens on Thursday 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.”

 Attrill was referring to the closely watched US Federal Reserve’s meeting.

Evergrande is widely expected to miss the interest payment on Thursday, according to market watchers and analysts. Technically it will not default provided it makes the payment within 30 days of the due date. On Monday, S&P Global Ratings indicated that Evergrande was more likely to default. Mizuho Bank economics and strategy head Vishnu Varathan said:

“Fact is, Evergrande is already in technical default having missed bank interest payment.”

Vishnu was referring to claims that the Chinese government had informed major banks regarding the possibility of the real estate behemoth’s inability to pay interest on loans that were due on Monday. In a research note on Tuesday, Vishnu said:

“With risks of missing a bond coupon later this week, the capacity to spook capital markets remains significant; considering Evergrande accounts for ~11% of all Asia high-yield bonds.”

Dollar-denominated foreign bonds to be hit first

According to analysts, institutional and other international investors will be more impacted if these initial defaults occur than local Chinese investors.

Onshore, yuan-denominated bonds could take precedence over foreign, dollar-denominated bonds. This is because institutional or overseas investors are more likely to own offshore bonds, while domestic individual investors are more likely to hold domestic bonds. Vishnu told CNBC in an email:

“Clearly, the optics of bond investors getting paid when retail wealth management product holders and home-buyers are a long way off clarity, much less, resolution, do not sit well.”

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