(Bloomberg) – The bonds of the China Evergrande group are taking steep discounts in a key onshore funding market, showing just how risky bonds are seen by brokers on the continent.
According to data from China Securities Depository and Clearing Corp., holders of the 2023 yuan bond of Evergrande are forced to accept a 53% discount to pledge the note as collateral in the repo market, compared to 28 % in April. A reduction of around 57% in the bond’s face value was seen following the developer’s previous liquidity crisis in October, the data showed.
The bigger haircuts come as the real estate giant struggles to convince investors that it can generate enough cash to pay off debt. While Evergrande – the world’s most indebted developer – is rated the equivalent of an investment grade by China’s largest credit risk assessor, several of its onshore bonds collapsed to record levels this week as concerns about his financial health worsened.
Evergrande’s dollar bonds continued to prolong declines, while onshore tickets cut some losses on Wednesday. The 2023 bond was trading at 68 yuan, according to prices compiled by Bloomberg.
In China’s pledged repo market, the country’s small banks and brokers can access funding by pledging the securities they hold in return. If the seller defaults, the repo buyer can seize the securities to make up for the loss. Most bonds traded in China are eligible as collateral, although counterparties generally tend to prefer government or quasi-sovereign bonds to reduce risk.
This would make debt issued by Evergrande, a private developer, an unpopular option. Several pension operators have excluded its debt from their collateral pools for at least several years because of the risks involved, according to people involved in such transactions who have requested to remain anonymous to discuss internal matters.
Evergrande is in the process of selling properties and assets to cover over $ 300 billion in liabilities. Several large state-owned banks have already cut their loans to the company, after it had a $ 20 million bank deposit frozen by a local court last week.
Billions of dollars have been wiped out of the value of its Hong Kong-listed shares and those of its subsidiaries, shutting Evergrande’s access to public finance markets. Evergrande also hasn’t sold a dollar bond since January of last year as it seeks to deleverage.
Concerns about the developer have also spilled over into the broader offshore junk debt market, pushing yields on these bonds to double digits this month since the pandemic caused a global sell-off in March of last year. .
The 2023 bond is issued by Hengda Real Estate Group, the main onshore unit of Evergrande and the main issuer of yuan bonds. The rating is rated AAA by China Chengxin International Credit Rating Co. – the highest rating possible – although the agency placed nine of Evergrande’s onshore bonds on a watch list last month.
Chinese government officials have asked founding billionaire Hui Ka Yan to resolve the developer’s debt issues as quickly as possible. Hui sidestepped Evergrande’s latest crisis by making a deal with a group of investors who waived their right to a $ 13 billion repayment. The deal included support from local governments in Guangdong and the city of Shenzhen, where Evergrande is based.
Contact publisher Michael Bellart ([email protected])
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