China Evergrande (HKG: 3333) (OTC: EGRNF) shares are down another 7% in Hong Kong on news of a mainland default on a bond. The problem appears to be that it’s just not possible to keep all those plates continually spinning. This is what was meant by that old phrase that bankruptcy happens slowly, then all of a sudden. The ability to, in the initial stages, stave off payments, reschedule, calm creditors and so on. But at some point this becomes impossible and then it all happens suddenly.
From today’s news: “The mainland unit of China Evergrande Group said it missed principal and interest payments totaling several billion yuan, adding further uncertainty to the fate of the giant developer at the center of the country’s property crisis. Hengda Real Estate Group failed to repay 4 billion yuan ($547 million) in principal plus interest due on Sept. 25, the company said in a Shenzhen stock exchange filing Monday.” That’s, you know, a substantial sum to miss paying out.
But things get worse. As we’ve said about China Evergrande it’s obvious and clear that there needs to be a debt reorganisation here. But is that going to be possible? “The world’s most indebted developer, which had more than $300bn in liabilities at the time of its failure in 2021, had planned to issue various notes, including those linked to its listed subsidiaries in Hong Kong, and was expected to hold key creditor votes this week. But in an unexpected move late on Sunday, Evergrande said it could no longer issue “new notes” because its mainland business Hengda Real Estate was “being investigated”. This was an apparent reference to an investigation by the China Securities Regulatory Commission into a suspected breach of information disclosure rules. The company disclosed the investigation in August.” The standard way of dealing with a default is to issue new bonds and notes with longer repayment periods in the hope that the business will turn. But if you’re not allowed to issue new notes then this path is closed off.
China Evergrande share price from Google Finance
As we reported yesterday, there does seem to be a halt on that debt reorganisation at Evergrande: “China Evergrande (HKG: 3333) shares are down 24% this morning. The drop is as a result of news over the weekend. That debt restructuring they were about to go through, the one that had been boosting the stock since relisting? It’s not now going to happen. Or, at least, it’s now not going to happen now and upon the terms they’d been thrashing out.”
At least now we’ve got some information as to why - the authorities won’t allow it. Which does provide that smidgeon of hope - decisions by the authorities can be reversed if they decide that they’d really rather not see China Evergrande entirely fall over. But will they?
As has been true for many months now the continued survival of Evergrande depends upon political decisions being made inside China. As a viable business on its own it’s already gone - that’s the slow part of going bust. But whether the next bit, the fast and all of a sudden bit, happens depends upon those political decisions.
