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Evergrande strikes deal to calm fears company defaults, sparking global financial chaos

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Chinese real estate giant Evergrande has struck a deal to settle the interest payments, allaying fears that the company could default, leading to global financial chaos.

The crisis-stricken company had debts of more than $300 billion, but it has reached an agreement with bondholders, while China’s central bank has pumped more money into the banking system.

The indebted company is strongly linked to China’s broader economy, and fears of contagion have kept global stock and bond markets in suspense, similar to the Lehman Brothers collapse in 2008.

The announcement sparked a rally in global markets, with the FTSE 100 up 0.9 percent and the Shanghai market up 0.4 percent, although doubts remain about the company’s health. in the long-term.

Evergrande has admitted it is under “enormous pressure” to deal with its massive mountain of debt, and has warned it may not be able to meet its obligations.

Chinese real estate giant Evergrande has struck a deal to settle the interest payments, allaying fears of the company’s default and sparking global financial chaos.

Still, founder Xu Jiayin, a billionaire once considered Asia’s richest man, said on Tuesday that the company will “quickly get out of the darkest moment.”

In a statement to the Shenzhen Stock Exchange, Evergrande-owned Hengda said it had negotiated a plan to pay the interest owed on its 2025 bond, worth 232 million yuan ($35.9 million).

China’s central bank also injected 90 billion yuan ($14 billion) into the banking system, in sign of support as the country’s financial markets reopened and stabilized after a two-day hiatus for the Mid-Autumn Festival.

Hengda said it would settle the coupon payment due Thursday on its Shenzhen-traded September 2025 5.8 percent bond, adding that the bond “has already been resolved through private negotiations.”

It gave no further details and it was unclear whether the negotiations suggested an improvement in Evergrande’s financial health or progress towards restructuring.

The company must pay 232 million yuan ($36 million) in interest on the bond by Thursday.

The announcement sparked a rally in global markets, with the FTSE 100 rising 0.9 percent (pictured)

The announcement sparked a rally in global markets, with the FTSE 100 rising 0.9 percent (pictured)

Evergrande has not disclosed an $83.5 million interest payment also due on Thursday, or $47.5 million due next week.

Even if it misses the payment, the company still has a 30-day grace period before it is considered in default.

But Hengda’s announcement appeared to stabilize the market turmoil and S&P 500 futures rose.

“We are still trying to understand what this payment means for the other bonds,” said a source familiar with the situation, who declined to be identified as they are not authorized to speak to the media.

“But I imagine they want to stabilize the market and make other coupon payments, given the close scrutiny.”

Analysts said Wednesday’s payback will calm fearful markets somewhat in the near term.

But “to regain confidence in a more meaningful way, the market needs to see broad restructuring plans for Evergrande,” Gary Dugan, chief executive officer at the Global CIO Office, told Bloomberg News.

Evergrande, which epitomized the loan-to-build business model and was once China’s top-selling developer, owes about $300 billion, mostly to onshore investors.

The Dow Jones fell 0.2 percent but rebounded from its dip earlier in the week as fears mounted over Evergrande's possible collapse

The Dow Jones fell 0.2 percent but rebounded from its dip earlier in the week as fears mounted over Evergrande’s possible collapse

Analysts have downplayed the risk that the potential collapse threatens a ‘Lehman moment’ or liquidity crisis, which will freeze the financial system and spread globally.

But concerns remain about the fallout if a collapse leads to a real estate crash in the world’s second-largest economy.

The PBOC’s cash injection suggested some official efforts to contain the crisis, said Yasutada Suzuki, head of EM Investment at Sumitomo Mitsui Bank in Tokyo.

“I suspect this is to allay any concerns about Evergrande and it shows that the PBOC is trying to support the (money) market,” he said.

Fed Chair Jerome Powell will likely be asked about Evergrande’s fallout when he speaks at 6:30 p.m. after the Fed’s two-day meeting.

Despite the impending bankruptcy, some funds have increased their positions in recent months.

BlackRock and investment banks HSBC and UBS were among the largest buyers of Evergrande’s debt.

Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager.

As of Sept. 17, Evergrande’s onshore bonds have only been traded through negotiated trades, and Refinitiv data shows no trades were recorded on Wednesday.

This aerial image, taken on September 17, 2021, shows the stalled Evergrande Cultural Tourism City, a mixed-use residential-retail entertainment project, in Taicang, Suzhou City, under construction

This aerial image, taken on September 17, 2021, shows the stalled Evergrande Cultural Tourism City, a mixed-use residential-retail entertainment project, in Taicang, Suzhou City, under construction

Dollar bonds were stable in thin trading and Hong Kong-listed stocks were not trading due to a holiday. Evergrande shares in Frankfurt are up 20%.

S&P Global Ratings said Monday it believed the Chinese government would act only in the event of a wide-ranging contagion that poses systemic risks to the economy.

BNP Paribas estimates that less than $50 billion of Evergrande’s debt is financed by bank loans, suggesting that the banking sector will have sufficient buffer to absorb bad debt.

“I would characterize Evergrande as a wired and controlled blast,” said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, which has no holding in the company.

While primarily a developer, Evergrande — which employs 200,000 people, has a presence in more than 280 cities and indirectly claims to generate 3.8 million Chinese jobs — has been buying for more than a decade.

The company has hired experts, including financial services firm Houlihan Lokey – who advised on the restructuring of Lehman Brothers when it went bankrupt during the global financial crisis – to avoid a collapse.

State regulators have also sent a team of financial advisers to assess the company, according to reports.

News of the deal gave stocks support on Wednesday, with Shanghai leading most Asian markets even as traders bounced back from a long weekend break to make up for Monday’s global defeat.

The Shanghai market closed 0.40 percent higher on Wednesday, though Shenzhen fell 0.25 percent.

Abdul Abiad, director of macroeconomic research at the Asian Development Bank, told reporters during a virtual briefing that China’s banking system’s “capital buffers are strong enough to absorb a shock even the magnitude of Evergrande, should that materialize.” ‘.

This week, the central bank injected some $14 billion into financial markets to allay concerns about potential liquidity pressures from the Evergrande crisis.

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