China Evergrande Averts First Onshore Public Default

Evergrande is the world’s most indebted developer, with more than $300 billion in liabilities spanning onshore and offshore bonds, loans from banks and shadow-banking lenders, payments from home buyers for unfinished houses, and sums due to suppliers.

The company is judged to be in default by international rating companies, after failing to make some payments on dollar bonds.

Onshore, however, Evergrande has somewhat stronger credit ratings on paper, even though it is in debt-restructuring mode and has sought government help. It hasn’t defaulted on any of its 56 billion yuan, or roughly $8.8 billion, of outstanding publicly traded bonds and asset-backed securities, Wind data shows.

Evergrande’s main onshore subsidiary, Hengda Real Estate Group Co., said late Thursday Shanghai time that holders of a 4.5 billion yuan note had voted to defer coupon payments by six months to July 8, following a series of meetings. Creditors also pushed back a redemption option that could have forced Hengda to repurchase some of the bonds.

Many onshore bonds issued by developers are held by financial institutions, like city-level commercial banks and trust companies, which may have also extended loans to a borrower. These creditors can be open to compromising over bond repayments if it helps avoid a default that would prompt a rush of demands for immediate repayment.

Bankruptcy and restructuring cases can take years to work their way through the Chinese legal system, and don’t always lead to good outcomes for creditors, which can also make it more appealing to strike a deal with a borrower. Bonds and loans in China typically don’t include cross-default clauses that are triggered by offshore events.

“For many developers, defaulting on their onshore bonds may have a far greater impact on the company than defaulting offshore,” said Frank Zheng, head of international fixed income at China Asset Management Co.

While global investors tend to follow market principles, onshore creditors usually have more financial ties to borrowers, Mr. Zheng said. “The bondholder structure of some developers’ onshore and offshore bonds is very different, which leads to different bondholder behaviors,” he said.

Debt bankers in mainland China say that bond underwriters would usually sound out big investors ahead of a proposed maturity extension, and would work with them to reach a solution before any deal is put to a vote.

Some other Chinese developers have also defaulted offshore but managed to avoid doing so onshore.

For example, luxury developer Fantasia Holdings Group Co. failed to repay a maturing dollar bond in October, but hasn’t defaulted on any of its roughly $1 billion of publicly traded yuan bonds. In November and December, it persuaded investors to extend the maturity of two onshore bonds by two years each and extend some of the coming interest payments of a third bond by one year.

At the same time, the turmoil in the international bond markets has continued for Chinese developers, with junk bonds from many issuers trading at deeply distressed levels, and the sector weathering many downgrades from international rating firms.

For example, S&P Global Ratings cut R&F Properties (HK) Co. to a “selective default” rating after the company concluded a maturity extension and partial buyback of $725 million of bonds that came due Thursday. S&P said it viewed the deal as a distressed restructuring that was “tantamount to default.”

Credit ratings in China are typically much higher than international equivalents. China Chengxin International Credit Rating Co. gave Evergrande the highest, triple-A credit rating when the just-extended bond deal was issued, and now gives the company and this bond a single-B rating.

Write to Rebecca Feng at [email protected]