Evergrande bonds bought back by troubled debt investors

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Distressed debt funds and individual investors are flocking to bonds issued by Chinese property developer Evergrande, betting Beijing will be forced to rescue the nation’s most indebted company.

The Evergrande debt-buying rush comes as many more conservative pension funds, insurers and other institutional investors have backed away from the group amid fears of contagion in the Chinese real estate market and the global financial system.

“Evergrande is an incredibly interesting, but very complex situation that will likely unfold over several years,” said Jason Friedman, partner at Marathon Asset Management, one of the funds that have built a position in Evergrande.

US funds Saba Capital Management, Redwood Capital Management, Silver Point Capital and Contrarian Capital Management have also bought Evergrande bonds in recent weeks, according to people familiar with the matter.

Uncertainty about Evergrande’s future deepened after the Shenzhen-based group missed the $ 83.5 million interest payment deadline on a dollar-denominated bond last Friday, triggering a grace period of 30 days before a formal default. Evergrande made no announcement regarding that payment or whether he made another coupon payment of around $ 45 million that was due on Wednesday.

As wider investor attention shifted to Evergrande’s other impending bonds, trade in some of its debt rose, with volumes surpassing $ 124 million on Wednesday for a bond of one. dollar maturing in 2025, according to Bloomberg data.

Louis Tse, managing director of Hong Kong-based brokerage firm Wealthy Securities, said the “intense and intense trading” of Evergrande dollar bonds in recent sessions was driven in part by investors in debt in difficulty buying on the hope that Beijing would lead a restructuring rather than allow the company to collapse.

“They are confident that whatever happens to Evergrande as a whole there will be a solution,” Tse said.

Recovering Evergrande’s losses will be a daunting task. The company said on Wednesday it had sold a 20% stake in a regional Chinese bank to raise $ 1.5 billion, but that amounted to less than 1% of its total liabilities of more than $ 300 billion.

Traders said many long-term bond holders had already left Evergrande before last week’s payment deadline, with investors stepping in – a strategy dubbed bottom feeding.

“Most of them are struggling debt sharks trying to make a quick buck,” said a Hong Kong-based bond investor.

Evergrande, one of the largest borrowers in Asian corporate dollar bond markets, has $ 20 billion in dollar-denominated bonds outstanding. Bonds maturing in March 2022 have traded at around $ 0.26 to the dollar this week.

Another investor in a Hong Kong-based family office said he bought Evergrande’s debt for the first time last week, hoping the Chinese government would end up orchestrating the country’s biggest corporate restructuring.

The People’s Bank of China, the central bank, this week called on the country’s financial institutions to safeguard the “stable and healthy development” of the real estate market and to protect “the rights and legitimate interests” of home buyers.

Line graph of the price of Evergrande's dollar bond maturing in March 2022 showing that 'bottom contributors' see an opportunity in Evergrande's distress

“I bet this case will be settled out of court, such as through a low-cost takeover bid, a debt / equity ratio [swap], or whatever, ”the investor said.

He bought a note issued by Hengda Real Estate, Evergrande’s main onshore subsidiary, when it was trading close to $ 0.16 to the dollar. He expected to almost double his money over the next few months.

“This is not fundamental analysis, but most of the defaulting Chinese bonds are trading above this level,” he said. “I’m aiming for 30 years.”

The investor cited dollar bonds issued by other Chinese companies priced between $ 0.20 and $ 0.30 to the dollar, despite defaults and, in some cases, restructuring efforts being carried out. by the state. They included technology companies backed by Beijing Tsinghua Unigroup and Peking University Founder Group, as well as real estate developer China Fortune Land Development.

Markets are bracing for Evergrande’s next debt repayment deadline of October 11, when the developer is due to make coupon payments totaling nearly $ 150 million on three-dollar bonds.

U.S. credit funds Saba, Redwood, Silver Point and Contrarian declined to comment.

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

Carol M. Barragan

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