Evergrande: US fund unimpressed as China treats credit distress, bond defaults with kid gloves
- Authorities are keen to avoid dislocations in the economy, as evidenced by the fact Evergrande, Huarong are ‘being treated with kid gloves’
- More efforts are needed to establish a transparent and reliable default mechanism in China’s bond market, US fund manager says
Despite efforts to boost transparency and discard moral hazard, Chinese bond issuers continue to ease or postpone debt repayments by issuing rollover debt, seeking deadline extensions, or cancelling features such as early redemptions, according to Kate Jaquet, a money manager at California-based Seafarer Capital Partners, which focuses on emerging markets.
Others have avoided default by undertaking private negotiations with individual creditors, often persuading bondholders not to exercise put options, deferring interest payments on perpetual securities, forcing debt exchanges, or even repaying bondholders outside the proper clearing channels some days or weeks late, she added.
“If regulators continue to tolerate the opaque and crafty tactics that have been prevalent in the past, investors will remain hesitant,” she said in a report on Seafarer’s website. “The market’s development will be stunted.”
The crisis at Evergrande, which is saddled with 1.97 trillion yuan (US$305 billion) of liabilities, is being closely watched as a test of how China is treating foreign investors in debt restructuring. The Shenzhen-based developer last month invoked a 30-day grace period on two bond interest payments amid a liquidity crunch. That reprieve ends later this week.