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China’s Big ‘Junk Debt’ Snowball Doesn’t Come Until Spring

The problem of Chinese real estate giant Evergrande with its debt and the possibility of a gigantic bankruptcy has started to make markets nervous in recent days, but the company and the Asian high yield debt segment still have several months of margin. to put some order in their financial situation , and avoid a serious debt crisis that spreads to the world economy.

At least, until spring arrives, the company will not have to face billion-dollar maturities of its debt, since, according to the maturity calendar that the firm has ahead of it, it is in March that its next big appointment with creditors will arrive. .

Of course, before that, tomorrow the company will have to render accounts with its creditors worth almost 120 million dollars, a small part of the almost 670 million in maturities that the company has to face between now and the end of anus. Until next year, the day when the company will have to face the largest maturities is December 28 , when it will have to pay more than 250 million dollars in a single day.

However, the definitive test for the company will come in March, with the repayment of more than 2 billion dollars in debt by then, of the 7.4 billion that the company will have to repay throughout 2022.

Grace period until April
Most reports and analysts rule out that Evergrande’s fall carries systemic risk, despite the fact that it is “Asia’s largest issuer of bonds without investment grade ( high yield ) rating in dollars,” according to UBP.

A key to ruling out a global contagion is that China and Evergrande have a certain margin of time to be able to handle this situation , since 75% of the maturities of this type of debt in all of China between now and 2023 are concentrated from April of the next year, according to AFI (see graph). “The bulk of maturities in dollars issued by Chinese companies in the high yield segment in the offshore market are concentrated in the second and third quarters of next year,” the firm explains.

These deadlines provide “a grace period,” as Citi’s team of analysts describe it, so that Evergrande’s default does not spread to the global financial sector, not even China. This same Tuesday, the banks of Europe and the United States stopped the bulging hemorrhage in the stock market of Monday, even recovered part of the lost.

In addition, another factor that stands out from Afi that supposes a respite in this crisis is “the high demand with which, last week, the market absorbed 20,000 million dollars in the primary market of Asian corporate debt”.

Between 20% and 30% of GDP
“Evergrande only accounts for 4% of China’s real estate transactions and a relatively small fraction of employment; instead, the economic importance of the real estate sector in general is much greater, as it is estimated to contribute between 20% and 30%. of China’s gross domestic product if all property-related activities are taken into account, “emphasize Sophie Altermatt and Richard Tang, economist at Julius Baer. “Therefore, it is essential that any possible default or restructuring of Evergrande is carefully managed to minimize contagion effects,” these experts add.

“Evergrande has misbehaved and been too greedy according to the Chinese Government’s criteria : it has been trapped by the three red lines imposed by Beijing – ratio between liabilities and assets of at least 70%; net leverage must be less than 100%; short-term debt cannot exceed the liquidity position-, and they will have to solve the situation on their own as long as the contagion is not excessive, but China will not tolerate that this ends up being a systemic risk event and it is likely that be quarantined to limit contagion to weak real estate developers and not to the market in general “, explains Diego Fern├índez Elices, general director of investment at A&G.

“Evergrande is not representative of the sector in China [most of the other big developers in the country have a debt of more than 50%], but it is a weak link in the chain, with its low credit rating and twice as many violations of the three red lines, “says the expert.

What can determine that the Evergrande crisis does not spread to the world economy is that the Chinese public banks serve as a firewall and cushion the burden of defaults in the coming months. “The regulator has the capacity to deal with these incidents , something that has been demonstrated with the case of Baoshang Bank: after getting into trouble, the regulator took responsibility and a debt restructuring was carried out,” recalls Bloomberg Economics.

S&P goes against the consensus and expects the company to go out of business
“We do not expect the Government to provide any direct support,” they point out from S&P when they envision a possible default and bankruptcy of the company, which accumulates a debt of about 300,000 million dollars, an amount that could end up infecting other companies in the country. “We believe that Beijing would only be forced to intervene if there is a wide-ranging contagion that causes the failure of several companies in the sector and poses systemic risks for the economy,” these analysts say.

Thus, it seems that S&P is clear that Evergrande has its days numbered, but it also assumes that the regulator will act if it considers that there may be contagion to other sectors. S&P does not hide when considering that the ‘default’ of the real estate giant would be worth the Chinese Government to set an example to the rest of the sector. “A government bailout would undermine the drive to instill greater financial discipline in the real estate sector,” the agency says.

It must be remembered that this crisis has been unleashed at a time when Beijing is carrying out a process of tightening regulations for different economic and business sectors of the country, especially for the large technology monopolies, and there are not few experts who They have highlighted in recent weeks that the regulator’s decisions are made to set an example for different industries.

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