This Is the Evergrande Endgame as China’s Property Problems Spread

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast, I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, it feels like it's another day, another default by a Chinese property developer. And so just today, I should say we're recording this on January 20th, we saw a company called Oyan, I'm probably not pronouncing that right, saying that it won't make payments on four bonds that I think add up to almost $700 million. But here's the weird thing.

For a brief moment this week, it seemed like people, investors were getting more optimistic about the Chinese real estate space. We actually saw a pretty dramatic rally in dollar bonds from junk rated property developers because there were some reports that China would make it easier for property companies to get cash from presales of developments. And then of course, we saw China lower its interest rates earlier this week, which obviously monetary easing is going to be good for housing. So there seem to be these really opposite push-pull factors at the moment. And no one seems to know quite what is going on in the space.

Joe Weisenthal (1:25)

I have to say, I kind of missed, in all my scanning of the news, I actually kind of missed the optimism period you were talking about, because every time...

Tracy Alloway (1:35)

Yeah, I mean, it was only a day. We're back to pessimism already.

Joe Weisenthal (1:39)

Because I have to say, every time I read...

Obviously, look, sort of like Q4 of last year, we were talking a lot about Evergrande and the trouble they were getting into. And it feels like since then, things have metastasized. More developers getting into trouble, more fears of default, maybe companies that were perceived as being safer credit risks than Evergrande was getting into trouble. So it really feels that the big story, or at least every time I look into it, it's like, this situation is getting worse.

Tracy Alloway (2:09)

Yeah, so we haven't really seen an extreme financial crisis, like a Lehman moment that some people were talking about late last year. But we have seen contagion in the sense that we have seen spreads on other junk-rated dollar bonds go up quite a bit. But really, I think the question no one quite knows yet is what exactly is the end game here? Like, what exactly is China trying to achieve? Are they going to provide policy support for property developers, or are they going to reform the market and let the weaker players fail?

So today, I'm very pleased to say that we have the perfect person to come on and give us an update on what's really going on in Chinese real estate. We're going to be speaking with Travis Lundy. He's an independent analyst who publishes on the Smartkarma platform. And of course, we had him on the show last year to talk about China Evergrande, which has since then finally and officially defaulted on its debt.

So Travis, thank you so much for coming back on the show.

Travis Lundy (3:12)

Thank you for having me.

Tracy Alloway (3:15)

I'm trying to think where to begin because there has been so much going on in this space, but maybe just to start, you can give us an update on, I guess, the current situation around Chinese property developers. What have we seen since we last spoke to you and since Evergrande actually defaulted?

Travis Lundy (3:34)

Okay, if we take it back a little bit further, back to when we last spoke, and I think we can use Evergrande as a kind of case study for the way other developers have also seen deterioration. And because Evergrande is so large, it effectively encompasses the size of several other smaller developers who might default. The loan interest payments were not made on domestic bank loans, it appears. Trust loan repayments were not made. Wealth management products have not been repaid at their maturity. At some point in late Q3 to early Q4, something like half of the projects that Evergrande was working on had seen work suspended. At that point, we've seen a certain amount of positioning. People are positioning for the fall. Local governments started looking at taking back land. Evergrande was trying to reduce its debt by delivering assets, selling assets to other developers, selling assets to local government-affiliated SOEs. Basically, none of that worked. Eventually, Evergrande ran into problems paying its coupons on its offshore debt, paid a bunch of them late. It got an extension on a guarantee on a private debt, which people did not know existed.

That extension required delivery of certain documentation from a municipal government. That documentation didn't arrive. The bondholders demanded repayment. That came with the end of a grace period of another coupon, and Evergrande just tossed in a towel and said, we're not paying. That triggered an event of default on the offshore notes, all of them.