China Evergrande Group’s stock rallied before paring the advance, an indication that investors remain wary over debt talks as the distressed developer faces a key coupon payment test on a dollar bond.
The Hong Kong-listed shares gave up gains of as much as 32% to end Thursday nearly 18% higher. The earlier surge came as a delayed reaction to news that a unit of the developer had negotiated interest payments on yuan notes, with trading shut Wednesday for a holiday.
“The ‘resolved’ onshore coupon probably signaled that the authorities are trying to contain a disorderly default and working on a restructuring plan,” said Thu Ha Chow, a portfolio manager at Loomis Sayles Investments Asia Pte. “The property sector continues to remain very volatile as it waits for a resolution for Evergrande. The quick rise was probably due to short-covering but it seems like there are still sellers into strength.”
With a coupon payment due on Evergrande’s 2022 dollar bond on Thursday, traders have been looking for any signs that the world’s most-indebted developer would be able to navigate its way through $300 billion of liabilities without going into default. While Evergrande’s onshore property unit didn’t provide details on the negotiated yuan bond payment in its Wednesday statement, it was the first clue laid out on the roadmap.
Evergrande’s rebound spurred a broader rally in Chinese stocks and the bonds of other developers, which had been sold earlier on contagion fear. And in a sign of support for the volatile market, China’s central bank pumped the most short-term liquidity in eight months into the financial system.
The rally in Evergrande’s Hong Kong stock has seen about 738 million shares change hands, compared with the one-year daily average of 40 million. Short interest as a percentage of its free float dropped to 15% on Tuesday from about 20% 10 days ago, according to the latest IHS Markit data.
Still, a major backer for Hui Ka Yan’s company said Thursday that it may exit all of its holdings in another sign that investors are losing confidence. Chinese Estates Holdings Ltd. sold 108.9 million Evergrande shares from Aug. 30 to Sept. 21, according to a statement to the Hong Kong exchange.
Evergrande’s onshore property unit had said in a vaguely-worded filing that an interest payment due the following day on one of its yuan-denominated bonds “has been resolved via negotiations off the clearing house.” It didn’t specify how much interest would be paid or when.
The filing “displayed that maintaining bond solvency was still on the agenda for Evergrande and also raised hopes for investors that creditors are to an extent open to resolution,” said Justin Tang, head of Asian research at United First Partners. “The read-through is that an orderly restructuring/negotiation is still on the cards for other onshore and offshore creditors and could buy the time Evergrande so desperately needs.”
Fear that Evergrande could trigger systemic risks in China rocked global markets earlier this week, spurring a slew of analysts to argue that Beijing would provide enough support such that it won’t become a Lehman moment. At least seven Chinese banks have in recent days sought to assuage investors over their exposure.
“If a large default can be done in an orderly and hopefully transparent process, then it can give investors confidence in the system,” said Loomis’s Chow, “This is especially as defaults become a more regular feature of the China credit market, in line with other global credit markets.”
Attention is now turning to a $83.5 million coupon payment that Evergrande is slated to deliver Thursday on the 2022 dollar note. The coupon on the 8.25% security, which has a 30-day grace period before a missed payment would constitute a default, is part of $669 million of bond interest due through the end of this year.
Evergrande’s 8.25% dollar bond due 2022 climbed 3.5 cents on the dollar to 28.7 cents as of 4:09 p.m. local time, according to Bloomberg-compiled prices.
Also helping improve investor sentiment is a local media report that cited Evergrande founder Hui as saying that the company needs to resume construction to ensure smooth completion of property projects. He also pledged to ensure repayment of the company’s investment products.
In a broader sign of better mood in Asia’s dollar bond market, four Chinese firms were offering fresh deals Thursday, ending a three-day lull amid holidays and concern about contagion from Evergrande’s debt woes. Even a junk-rated developer, Jiayuan International Group Ltd., was among the potential issuers.
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