Hengda Real Estate Group Co Ltd, China Evergrande Group’s leading unit, applied on September 16 to hold off on trading of its onshore corporate bonds after a downgrade, as the nation’s No. 2 real estate developer struggles extensively with a liquidity crisis.
The application comes after recurrent trading interruptions of the bonds lately by the Shanghai and Shenzen stock exchanges because of volatile market conditions.
With liabilities summing up to over $300 billion, Evergrande is rushing to acquire funds as it sways between a chaotic meltdown with far-reaching effects, a managed collapse, or a government bailout.
Market participants said that the postponement of trade-in with Hendga’s onshore corporate bonds demonstrates a growing possibility of defaults and restructuring.
Hengda stated in a stock exchange filing that it had received notice on September 15 from rating agency China Chengxin International (CCXI) that the bonds’ ratings had been devalued from “AA” to “A”. The notice also stated that both the bonds’ ratings and its issuer rating were put on a watch list for more declines.
Application for suspension of trade of its onshore corporate bonds was meant to last for a day, Hengda said. Its Shanghai and Shenzhen exchange-traded bonds will only be traded through negotiated transactions after the resumption of trade on September 17, 2021. One anonymous bond trader stated:
“The changes in the trading mechanism were plausibly aimed at restraining participation and curbing volatility. Many companies would adjust the trading mechanism of their bonds ahead of default.”
On September 15, the company’s January 2023 Shenzhen-traded bond was last quoted at 24.99 yuan while its Shanghai-traded May 2023 bond was traded at 30 yuan.
A distressed debt analyst at credit analytics provider Reorg, James Shi, said that an Evergrande default has been mainly priced into the market and that a recovery ratio will probably be low in the case of an anticipated restructuring. Shi said:
“The market is pretty certain Evergrande will default. A very slow recovery ratio would be partly because of extensive losses at many of Evergrande’s non-core businesses, making them difficult to liquidate.”
The report by CreditSights this week said that the possibility of liquidation was low if Evergrande defaults.
The Evergrande’s bonds valuation would be attractive for all the patient investors if they dropped below 20 cents on the dollar as a restructuring may take several years, according to a Shanghai-based vulture bond fund manager, who specializes in junk-rated bonds.
Evergrande’s 8.75% June 2025 dollar bond was trading at 29.375 cents in the offshore market on Thursday morning, up about 4 cents from lows recorded on Wednesday, based on data acquired from Duration Finance.
Goldman Sachs said in a statement 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 extended.
Evergrande’s credit crisis has caused distress of possible contagion spilling over to other Chinese high-yield issuers. An index of Chinese high-yield dollar debt fell to 374.646, its lowest level since April 14, 2021, on Thursday Morning.
CCXI’s downgrade of the real estate developer was its second this month. A devalue of Evergrande and its onshore bonds from “AAA” to “AA” on September 2 led to the bonds being made ineligible for pledged repo trading.
S&P, a rating agency, this week further degraded Evergrande from “CCC” to “CC”, with a negative outlook, citing reduced liquidity and default risks including the opportunity of debt restructuring while Fitch said that an Evergrande default could subject several sectors to deepened credit risk and crisis.