Interest payments on bonds, impact on investors

Interest payments on bonds, impact on investors

An aerial photograph taken on September 17, 2021 shows a building complex of Chinese real estate developer Evergrande in Huayan, east China’s Jiangsu Province.

silt | AFP | Getty Images

The first test of the Evergrande debt crisis takes place this week – investors will be watching whether the embattled Chinese property developer is able to pay the interest owed on the bond or default.

The company owes $ 83 million in interest on Thursday, according to data from S&P Global Ratings.

According to market data provider Refinitiv Eikon, Evergrande’s 5-year US dollar-denominated bonds had an initial issue size of around $ 2 billion, although the price has now fallen.

According to Refinitiv Eikon, the yield on this bond rose to 560% from just 10% earlier this year. The bond matures in March 2022.

Another interest payment on the 7-year US dollar bond is due next Wednesday.

Ray Attrill, referring to US central bank meetings, told CNBC: “What happens on Thursday promises to be an important event for the markets, in one way or another, more important than the outcome. of the FOMC which is probably a few hours away. It must have happened before. Monitored closely by investors.

Analysts and market watchers largely expect Evergrande to miss interest payments on Thursday. However, he will not technically be in default unless he does not make this payment within 30 days.

S&P Global Ratings said on Monday that the default was “likely”.

“The fact that Evergrande is already in technical default is what causes the bank to default on interest payments,” said Vishnu Varthan, head of economics and strategy at Mizuho Bank. He was referring to reports in which the Chinese government told major banks that the real estate giant would not be able to pay interest on its loans which were due on Monday earlier this week.

“With bond coupons in danger of wiping out later this week, the potential for fear in financial markets remains significant,” Varathan wrote in a note Tuesday.

Foreign investors, offshore bonds could be hit first

Analysts said if these early failures occurred, institutional investors and other foreign investors would be more affected in China than domestic investors.

It is possible that offshore bonds denominated in yuan will take precedence over offshore bonds denominated in dollars. Offshore bonds are mostly held by institutional or foreign investors, while domestic retail investors in China are more likely to hold onshore bonds.

“Obviously, bond investors pay off when owners of wealth management products and home buyers are far from clear, let alone the resolution does not fit,” Varthan told CNBC in an e -mail.

The case for asset management products to treat the obligations of retail investors more favorably “is strong given the social sustainability angles on this subject,” he said.

Protests from angry buyers and investors have erupted in some cities in recent weeks, and social unrest remains a major concern.

Last week, nearly 100 investors flocked to Evergrande’s headquarters in Shenzhen, seeking to repay loans on overdue financial products – a chaotic scene, according to Reuters.

Domestic investor preference will therefore have an impact on the default risks for offshore dollar-denominated bonds – mostly held by institutional investors or other foreign investors – versus onshore bonds, mostly held by domestic investors.

“However, another point of interest is whether coupons payable on offshore bonds will receive less preferential treatment than onshore bond coupons – especially given the asymmetric arrangement that offshore default does not trigger cross-default. (whereas onshore default triggers cross default for offshore), “Varthan told CNBC. A cross default occurs when a default triggered in one position spreads to other bonds, causing a widespread transition.

“In other words, will Evergrande choose to default only on offshore bonds while honoring its onshore commitments? Varthan asked.

Which funds own Evergrande bonds?

According to data from Morningstar Direct, UBS, HSBC and BlackRock have accumulated Evergrande bonds in recent months.

“We have seen the addition of some funds to China Evergrande between July and August 2021, given the large spread and attractive valuations,” said Patrick Gee, Morningstar manager research analyst.

Here are the top funds with the highest exposure to Evergrande bonds, according to Morningstar.

  • Fidelity Asian High Yield Fund
  • UBS (Lux) BS Asian High Yield (USD)
  • HSBC Global Investment Fund – Asia High Yield Bond XC
  • PIMCO GIS Asia High Yield Bond Fund
  • BlackRock BGF Asian High Yield Bond Fund
  • Allianz Dynamic High Yield Bond

Brittany Dave of CNBC contributed to this report.

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