Evergrande Contagion Fear Returns as Bonds Tumble Below 30 Cents
Comment of the Day

September 02 2021

Commentary by Eoin Treacy

Evergrande Contagion Fear Returns as Bonds Tumble Below 30 Cents

This article from Bloomberg may be of interest to subscribers. Here is a section:

One of the company’s most widely held bonds plunged by 6 cents on the dollar to 28.5 cents on Wednesday, a record low. The rout -- triggered by Evergrande’s warning of a potential default if its asset-sale plans fail to materialize -- accelerated during European market hours as private banks offloaded positions, traders said.

The collateral damage was concentrated in junk-rated developers including Kaisa Group Holdings Ltd., Fantasia Holdings Group Co. and Guangzhou R&F Properties Co. The latter company’s dollar notes due 2024 tumbled 4.1 cents to 66.8, according to Bloomberg-compiled data. Declines in the broader Chinese high-yield space reached as much as 2 cents on the dollar, halting a tentative rally over the past few days. 

Investors in China’s $12 trillion bond market have become fixated on Evergrande as they weigh the ramifications of a potential default by the world’s most indebted developer. With bondholders, banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China’s economy. While regulators urged the company to resolve its debt woes in a rare public rebuke earlier this month, they have said little about whether state support is forthcoming. President Xi Jinping has been trying to wean the Chinese financial system off implicit government guarantees that fueled years of outsized borrowing.

Eoin Treacy's view

China Evergrande is the biggest issuer of US Dollar denominated debt in the emerging markets. The financial markets are floating on a sea of Dollars. There are so many dollars in circulation that cross currency swaps are close to moving into a positive spread for the first time in years. Therefore, Evergrande’s problems are not arising because global liquidity is tightening. Instead, they are the result of government efforts to contain leverage ratios in the Chinese property market.

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