Evergrande’s crisis puts Hong Kong-China debt restructuring accord to the test before ink runs dry on pilot agreement

A cross-border arrangement between Hong Kong and Beijing over corporate restructurings could soon face its first real test as China Evergrande Group, the world’s most indebted property developer, teeters back and forth on the brink of default.

The May 14 agreement was designed to facilitate and better protect offshore debt holders in the enforcement of asset claims during a cross-border winding up and provide greater assurance to foreign investors who have added hundreds of billions of dollars in Chinese bonds into their investment portfolios in recent years.

The agreement is facing a crucial test, as 2021 is set to be another record year of bond defaults among China’s borrowers, especially the heavily leveraged real estate developers, squeezed between the slowest economic growth pace in years and a wary central bank with a tight grip on releasing loans.

Evergrande, with more than US$300 billion in liabilities, missed at least five interest payment deadlines on its offshore debt since late September, paying a US$83.5 million coupon last week just as a 30-day grace period was running out to stave off a default. Fantasia Holdings Group, founded by the niece of China’s former vice-president Zeng Qinghong, failed to pay US$205 million of debt on October 5. Sinic Holdings warned of default on US$250 million of bonds a week later, while Modern Land scrapped plans to pay US$250 million in a portion of its bond last week.