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Distressed debt funds and individual investors are flocking to bonds issued by Chinese property developer Evergrande, betting that Beijing will be forced to rescue the country’s most indebted company.
The rush to buy Evergrande debt comes as many pension funds, insurers and other more conservative institutional investors have distanced themselves from the group amid fears of contagion in the Chinese property market and the global financial system.
“Evergrande is an incredibly interesting, but highly complex situation that will likely play out over several years,” said Jason Friedman, partner at Marathon Asset Management, one of a clutch of funds that has built a position in Evergrande.
US funds Saba Capital Management, Redwood Capital Management, Silver Point Capital and Contrarian Capital Management have also bought Evergrande bonds over recent weeks, according to people familiar with the matter.
Uncertainty over Evergrande’s future has deepened after the Shenzhen-based group failed to meet a deadline for an $83.5m interest payment on a dollar-denominated bond last Friday, triggering a 30-day grace period before a formal default. Evergrande has made no announcement about that payment or whether it made another coupon payment of about $45m that was due on Wednesday.
While broader investor attention has shifted to Evergrande’s other looming obligations, trading in the bond whose coupon was due last week has surged, with volumes topping $124m on Wednesday, according to Bloomberg data.
Louis Tse, managing director of Hong Kong-based brokerage Wealthy Securities, said “heavy, heavy trading” of Evergrande’s dollar bonds in recent sessions had been driven partly by distressed debt investors buying on expectations that Beijing would lead a restructuring rather than allowing the company to collapse.
“They have confidence that whatever happens at Evergrande as a whole, there will be a solution,” Tse said.
Recovering losses from Evergrande will be a daunting task. The company said on Wednesday it had sold a 20 per cent stake in a Chinese regional bank to raise $1.5bn but that was equivalent to less than 1 per cent of its total liabilities of more than $300bn.
Traders said many long-term bondholders had already shifted out of Evergrande ahead of last week’s payment deadline, with investors cycling in to take their place — a strategy dubbed bottom feeding.
“These are mostly distressed debt sharks trying to make a quick buck,” said one Hong Kong-based bond investor.
Evergrande, one of the biggest borrowers on Asian corporate dollar bond markets, has $20bn of dollar-denominated bonds outstanding. Bonds maturing in March 2022 have traded at about $0.26 on the dollar this week.
Another investor at a Hong Kong-based family office said he first bought Evergrande debt last week on expectations that the Chinese government would eventually orchestrate the country’s biggest ever corporate restructuring.
The People’s Bank of China, the central bank, told the country’s financial institutions this week to safeguard the “stable and healthy development” of the real estate market and protect “the lawful rights and interests” of homebuyers.
“I am betting for this thing to get settled out of court, like via a low-price tender offer, a debt-to-equity [swap], or whatever,” the investor said.
He bought a note issued by Hengda Real Estate, Evergrande’s main onshore subsidiary, when it was trading near $0.16 on the dollar. He expected to nearly double his money over the coming months.
“This is not a fundamental analysis but most defaulted Chinese bonds trade above this level,” he said. “I am aiming for 30-ish.”
The investor cited dollar bonds issued by other Chinese corporates priced at between $0.20-0.30 on the dollar, despite defaults and in some cases state-led restructuring efforts. They included Beijing-backed tech companies Tsinghua Unigroup and Peking University Founder Group, as well as property developer China Fortune Land Development.
Markets are bracing for Evergrande’s next debt repayment deadline on October 11, when the developer is due to make coupon payments totalling almost $150m on three dollar bonds.
US credit funds Saba, Redwood, Silver Point and Contrarian declined to comment.
Additional reporting by Wang Xueqiao in Shanghai and Thomas Hale in Hong Kong