Evergrande bonds snapped up by distressed debt buyers

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Distressed debt funds and particular person buyers are flocking to bonds issued by Chinese language property developer Evergrande, betting that Beijing can be pressured to rescue the nation’s most indebted firm.

The push to purchase Evergrande debt comes as many pension funds, insurers and different extra conservative institutional buyers have distanced themselves from the group amid fears of contagion within the Chinese language property market and the global financial system.

“Evergrande is an extremely attention-grabbing, however extremely advanced state of affairs that can probably play out over a number of years,” mentioned Jason Friedman, companion at Marathon Asset Administration, one in every of a clutch of funds that has constructed a place in Evergrande.

US funds Saba Capital Administration, Redwood Capital Administration, Silver Level Capital and Contrarian Capital Administration have additionally purchased Evergrande bonds over current weeks, in keeping with individuals conversant in the matter.

Uncertainty over Evergrande’s future has deepened after the Shenzhen-based group failed to meet a deadline for an $83.5m curiosity fee on a dollar-denominated bond final Friday, triggering a 30-day grace interval earlier than a proper default. Evergrande has made no announcement about that fee or whether or not it made one other coupon fee of about $45m that was due on Wednesday.

Whereas broader investor consideration has shifted to Evergrande’s different looming obligations, buying and selling within the bond whose coupon was due final week has surged, with volumes topping $124m on Wednesday, in keeping with Bloomberg knowledge.

Louis Tse, managing director of Hong Kong-based brokerage Rich Securities, mentioned “heavy, heavy buying and selling” of Evergrande’s greenback bonds in current periods had been pushed partly by distressed debt buyers shopping for on expectations that Beijing would lead a restructuring moderately than permitting the corporate to break down.

“They’ve confidence that no matter occurs at Evergrande as a complete, there can be an answer,” Tse mentioned.

Column chart of Daily trading volume for bond with payment due Sept 24, 2021 ($m) showing Trading in Evergrande debt surges after missed payment

Recovering losses from Evergrande can be a frightening job. The corporate mentioned on Wednesday it had sold a 20 per cent stake in a Chinese language regional financial institution to lift $1.5bn however that was equal to lower than 1 per cent of its complete liabilities of greater than $300bn.

Merchants mentioned many long-term bondholders had already shifted out of Evergrande forward of final week’s fee deadline, with buyers biking in to take their place — a technique dubbed backside feeding.

“These are largely distressed debt sharks attempting to make a fast buck,” mentioned one Hong Kong-based bond investor.

Evergrande, one of many greatest debtors on Asian company greenback bond markets, has $20bn of dollar-denominated bonds excellent. Bonds maturing in March 2022 have traded at about $0.26 on the greenback this week.

One other investor at a Hong Kong-based household workplace mentioned he first purchased Evergrande debt final week on expectations that the Chinese language authorities would finally orchestrate the nation’s greatest ever company restructuring.

The Folks’s Financial institution of China, the central financial institution, advised the nation’s monetary establishments this week to safeguard the “steady and wholesome improvement” of the actual property market and shield “the lawful rights and pursuits” of homebuyers.

Line chart of Price of Evergrande dollar bond maturing in March 2022 showing 'Bottom feeders' see opportunity in Evergrande distress

“I’m betting for this factor to get settled out of court docket, like by way of a low-price tender provide, a debt-to-equity [swap], or no matter,” the investor mentioned.

He purchased a notice issued by Hengda Actual Property, Evergrande’s foremost onshore subsidiary, when it was buying and selling close to $0.16 on the greenback. He anticipated to just about double his cash over the approaching months.

“This isn’t a elementary evaluation however most defaulted Chinese language bonds commerce above this stage,” he mentioned. “I’m aiming for 30-ish.” 

The investor cited greenback bonds issued by different Chinese language corporates priced at between $0.20-0.30 on the greenback, regardless of defaults and in some circumstances state-led restructuring efforts. They included Beijing-backed tech firms Tsinghua Unigroup and Peking College Founder Group, in addition to property developer China Fortune Land Growth.

Markets are bracing for Evergrande’s subsequent debt reimbursement deadline on October 11, when the developer is because of make coupon funds totalling nearly $150m on three greenback bonds.

US credit score funds Saba, Redwood, Silver Level and Contrarian declined to remark.

Further reporting by Wang Xueqiao in Shanghai and Thomas Hale in Hong Kong

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