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Evergrande bondholders reflect on next steps following missed payments

By on September 28, 2021 0

The cash-strapped developer has another $ 45 million bond interest payment due Wednesday, and investors believe Evergrande is unlikely to find the money given its lack of public communication so far on its international obligations.

Evergrande has a grace period of 30 days before its non-payment constitutes an event of default on its obligations. Lawyers see last week’s failure to pay as the prelude to a complex restructuring of Evergrande’s roughly $ 304 billion liabilities, which includes more than $ 19 billion in outstanding $ bonds.

The investment funds that hold the bonds have sought to understand their options and are talking to various lawyers and advisers. Over the past week, some U.S. asset management executives have informally contacted their contacts in the Chinese government, hoping to better understand Beijing’s end goal for Evergrande and determine their next steps. , said a person familiar with the matter.

One procedural wildcard is how the Chinese government will deal with a potential developer collapse.

“It’s not about what the value of the assets is and to what extent a clawback should be given to bondholders,” said Karl Clowry, partner at London law firm Addleshaw Goddard LLP, who represents a number of offshore bondholders. “It’s more about how much the Chinese authorities and the big onshore players will allow foreign bondholders to receive. “

Evergrande’s 8.25% bonds that did not receive coupons last week are trading around 29 cents on the dollar, a price that implies investors expect to recover less than a third of the value origin of the bonds.

So far, Beijing has indicated that it will likely prioritize national interests that may be affected by the failure of Evergrande, such as suppliers who have not been paid, employees who have lent money. money to the business, home buyers who have paid down payments yet. apartments to be finished, and Chinese banks and investors.

While Evergrande did not pay the last interest payment on its offshore bonds, its main real estate unit reached a private settlement with the holders of its onshore bonds who were also due to pay a coupon last week. He did not say whether he settled this payment with cash or other assets.

Funds managed by BlackRock Inc.

and Ashmore Group are among the Evergrande offshore bondholders, according to public documents. The asset management arm of HSBC Holdings PLC previously held Evergrande bonds, but sold all of its stakes in the past six weeks, according to a person familiar with the matter. BlueBay Asset Management LLP is among the group of bondholders who expect to trade with Evergrande, according to people familiar with it. BlueBay did not comment.

Evergrande, China’s most indebted real estate developer, has kept global markets on alert and sparked protests in his country as he struggles to survive. WSJ explains why the corporate crisis raises questions about the state of the world’s second-largest economy. Photo credit: Alex Plavevski / Shutterstock

China Evergrande is incorporated in the Cayman Islands and has a few subsidiaries incorporated in the British Virgin Islands. The conglomerate owns some assets in Hong Kong, such as an office building and stakes in two publicly traded companies, but most of Evergrande’s assets are in mainland China.

It could be difficult for Evergrande’s offshore bondholders to get their claims recognized in mainland Chinese courts, several attorneys monitoring the situation have said.

According to Dennis Hranitzky, lawyer at Quinn Emanuel Urquhart & Sullivan LLP, offshore bondholders might first try to assert their rights in courts in the Cayman Islands or the British Virgin Islands, where Evergrande companies are registered.

Since the bonds are governed by New York law, bondholders might consider filing a claim in a New York court, he said.

Bonds on which Evergrande did not pay interest last week, like most of its other offshore bonds, have a provision in their credit agreement regarding missed payments. After the 30 day period after default, bondholders may declare default by sending a written notice to the bond trustee, Citicorp International, a division of Citigroup. Inc.

However, holders of at least 25% of the outstanding principal amount of the bond should organize themselves to meet the threshold for the written opinion to be taken into account.

But even if a court in New York, the Cayman Islands or the British Virgin Islands grants bondholders a judgment of an unpaid amount, they would have to take those judgments in China and attempt to enforce them there, said Mr. Hranitzky.

“It’s notoriously difficult to do,” Hranitzky said, noting that there is no treaty in place that would oblige a Chinese court to recognize the judgments of those courts.

Rather, offshore bondholders may seek to file claims in jurisdictions that would have a better chance of recognition, such as Singapore or Hong Kong, where some of the company’s securities are registered.

Some lawyers and investors also expect the Chinese authorities and Evergrande to come up with a restructuring plan that will not leave offshore bondholders behind, given the potential implications for other developers and private sector companies who have issued bonds in dollars and are expected to refinance them in the future.

“Holders of international bonds will have lower priority, but they will be taken into consideration,” said Alexander Aitken, partner at the Herbert Smith Freehills law firm in Hong Kong. “I don’t think the Chinese government wants an outcome that would ensure that Chinese private companies have no or limited access to global debt capital markets,” he added.

Evergrande could offer offshore bondholders some sort of compromise, such as a takeover bid that would collect the bonds, said Susheel Kirpalani, another lawyer for Quinn Emanuel, The fact that Evergrande hired Houlihan Lokey Inc.,

a well-known US investment bank, would indicate that the company may seek to engage with its offshore bondholders, he added.

“There are signs that the Chinese authorities are getting more involved in the restructuring of Evergrande, indicating an increasing likelihood of an orderly process. This should benefit all creditors, ”said Paul Lukaszewski, Asia-Pacific corporate debt manager at asset management firm Abrdn, who is monitoring the situation.

Evergrande’s electric vehicle company warned this week it was running out of cash. A person advising a bond group sees this development as a possible sign of internal contagion where the company’s problems in sharing real estate can spill over into other parts of its business.

China Evergrande Group: stalled construction, massive debts

Write to Alexander Gladstone at [email protected] and Frances Yoon at [email protected]

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