š„It's Interest Payment Day for Evergrande LOLš„
Despite Mr. Kopitsā concern, the market seems to have moved on from the short-lived shock that was China Evergrande Group to even more depressing (domestic) crises such as the debt limit, infrastructure, and inflation. Despite ghosting its foreign bondholders and triggering a 30-day grace period, the company is acting as if its business as usual. Should a bit of a financial crisis thwart plans to build one of the worldās largest soccer stadiums, for instance?
Make no mistake: this sh*t is still ugly. Note some of the stories out on the subject this week:
There are signs of intra-Chinese contagion. Another major Chinese developer, Sunac China Holdings, saw its capital structure get napalmed this week. Per the WSJ, āIts U.S.-dollar-denominated bonds also retreated, with 7% bonds due in July 2025 quoted at about 81 cents on the dollar by late afternoon Monday in Hong Kong, according to Tradeweb. This debt was quoted above 98 cents on the dollar at the start of the month, and as recently as July Sunac was able to raise $500 million of new debt funding from bond investors.ā š¬
Back here at home, the Federal Reserve is, to be safe, questioning big US banks about their exposure to Evergrande. Similarly, the Office of the Comptroller of the Currency and the Securities and Exchange Commission have reportedly been probing banks to determine whether there is any and to what degree there is any risk.
We recall seeing a funny skit years and years back about the construction workers toiling away while building the second Death Star and how crappy it must have been for them to be collateral damage in the Rebellionās war against the Empire. Thereās a similar dynamic here at play in Evergrande ā though hardly anyone is laughing. While the Chinese government purportedly attempts to shift projects away from one developer to another so as to salvage the entire property market and rescue depositors from a catastrophic loss, it's unclear what will happen to the unpaid bills of those working those jobs. Here is a Reuters article about the owner of a cleaning business owned $3.1mm by Evergrande. His company employs 100 people and uses 700-800 contractors to clean apartments before they hit the market. To pay off his own debts and wages, the poor guy had to sell off his Porsche Cayenne and put his apartment on the market. We imagine stories like these are pervasive across China.
This sh*t about shadow banking ātrustsā is bananas. Much like in the US, financing is potentially available from shadow banking trusts when regular-way banks arenāt an option. The trust industry in China is $3t large. Apparently tens of thousands of Chinese households provided financing to Evergrande by way of these trusts and ā ā”ļøsurprise!ā”ļøā Evergrande hasnāt made payments on the funds provided by these trusts. This is the companyās single biggest source of debt, people. This is insane. Apparently now the trusts themselves are going out of pocket to finance investor payments. How long will they be able to do so? The numbers are staggering. Per Bloomberg, āThe clock is ticking for Evergrande to make these investors whole. The cash-strapped firm faces repayments in the fourth quarter on $1.8 billion of high-yield products sold through trusts to wealthy clients and institutions. Another $4 billion is due next year, according to data provider Use Trust.ā YIKES. This is not good: āEvergrandeās dependence on trusts and other asset management products began growing after banks were directed to cut back on their lending to the property sector. By the end of 2019, Evergrande had done business with most of the 68 trust companies in China, which accounted for 41% of its total financing, based on the last borrowing disclosure.ā But the trusts were completely devoid of risk protocols; they began reducing their exposure in the first half of ā21, decreasing loans by 17%. Remember those stories about Evergrandeās wealth management products? Well once the shadow banking trusts decided that Evergrande was a deadbeat and reduced funding, Evergrande just went out with their own products to their employees, acting like predatory d*ckwads with no regard for the fact that they might be ruining the life savings of many an unsuspecting loyal employee. This story just gets worse and worse as more details come out.
China Evergrande New Energy Vehicle Group issued the equivalent of a going concern warning. HAHAHAHAHA. NO FRIKKEN SH*T. Just so you understand the magnitude of this absolute dumpster fire of a sh*tshow, a mere five months ago this thing had a market cap of $84b which makes it valued more than Ford Motor Co. ($F) ā despite never producing a working frikken automobile!! You canāt make this stuff up.
Evergrande has another interest payment due today on its 9.5% ā24 dollar-denominated bond. Oh. My. Whatever may happen with that? š¤ š
In closing, here is an intentionally provocative piece by Niall Ferguson which, in a nutshell, says that China is f*cked and therefore overrated. If so, itās hard, given the interconnected nature of the global economy, to imagine a scenario where this all goes south in China and remains contained.
But employing logic hasnāt been the most fruitful way to make money for years. So š¤·āāļø.