On Evergrande $3333.HK, I remain surprised we haven’t seen more commentary today about the Jumbo Fortune bond which matured 3 Oct.

It’s a privately-issued USD bond with guarantee by Evergrande, apparently. I say ‘apparently’ because the prospectus is not public.

The stories
out a couple weeks ago suggested there was no grace period (though it matured on a Sunday so wouldn’t pay til Monday) but the bondholders would extend a 5-day grace period.

That 5-day grace period ends today (assuming HK calendar).
Otherwise there are more coupons due today (with another 30-day grace period starting), then another later, but the Sep23 coupon 30d grace period ends 23 Oct.

If there is no news on Jumbo Fortune imminently one can presume either it was paid or renegotiated or the BHers
simply haven’t declared default, perhaps hoping the presumed imminent announcement on a potential Hopson deal to buy a 51% stake in Evergrande Property Svcs ($6666.HK) would deliver an initial payment imminently (depending on whether the HK$40bn was the valuation for 51% or 100%
(and I don’t know)), Evergrande (3333) could get $1.5-3.0bn almost immediately. That would kick the can a bit offshore. But as Fantasia has shown, the goal may be to default, then say ‘what’re you going to do about it?’ Then they work it out over time.

As written months ago,
there is little chance this ends well for equity holders (though HKY could pull a Noble) and the disposition will favour those deemed most ‘secured’ in what will be a complicated and time/consuming waterfall to navigate.

The biggest issue for the moment is that everyone is in
wait-and-see mode. Secondary sales over GW in southern China were anemic. EG primary sales a trifle better than non-existent, but across the industry Sep sales were way lower than last year. Last year saw a number of big discounts to boost uptake because it came just after the
Three Red Lines (and while that was a ‘surprise’ to outside observers), EG’s chairman had publicised a pledge to cut debt by RMB 450bn in 3yrs just six months earlier (than the 3RL). He knew it was coming. But suffice it to say, Sep2020 was a high basis so Sep21 lower is easy.
However, not 36% lower. That’s a lot. And it will cause more problems.

The ongoing question is really about who takes the hit on capital (timing or amount) to ensure that the projects can get lower-cost takeouts (effectively SOE and SASAC and healthy private developers
providing DIP funding to finish projects for homeowners). And I don’t have a really good idea of that. I think it still has to be Hengda bondholders and at some point, the local creditor committee dealing with GZ govt will have to step up and say ‘this is how it will be done.
And in the background I still wonder whether Huarong or Citic end up being the manager or injecting one in. I am not sure how one can keep existing mgmt in place if there are more private bonds like JF.

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More from @travislundyasia

13 Oct
I just finished listening to the always excellent Odd Lots podcast with @tracyalloway and @TheStalwart - this time about the macroeconomic implications of the Evergrande situation with @michaelxpettis.

A great listen. Worth your time.

Professor Pettis lays it out quite cleanly, noting (in an opinion I agree with) that Evergrande did not start the fire, and that the overarching policy aims meant this was going to happen at some point. Evergrande is the poster-child because of its presence in USD debt markets
but the situation is following the model of previous cleanups starting a few years ago (Professor Pettis mentions Baoshang Bank as one model (tho I prefer HNA as the model because it will likely be a local govt-organised restructure rather than a regulator-driven restructure))
Read 24 tweets
28 Sep
Reuters: SOE developers and local govts asked to step in to buy Evergrande assets.

This has been my central theorem for a "market-oriented approach" solution.

Avoid direct state intervention. Get state govts to supply slightly senior/pref equity.

reuters.com/world/china/ch…
Get quasi-private sector involved to manage project completion with effective credit enhancement to projects. Get some cash into projects to complete them, possibly to push some equity back to Hengda.

Allow Hengda to wind itself down slowly through debt repayment.
It may not happen quickly enough for everyone, but 'progress' which looks like the right people (those who got rich) are suffering pain and the right people(those who bought flats) are being prioritised would go some way to mollify the crowds.
Read 4 tweets
22 Sep
A short follow-up on Evergrande ($3333 HK)

Thanks to all for listening to the podcast with @TheStalwart and @tracyalloway.

First, some housekeeping:

The podcast is here (or on Apple podcasts, or Spotify): bloomberg.com/news/articles/…

The transcript here: bloomberg.com/news/articles/…
Since we recorded that, there have been any number of news stories and developments covered in the SCMP, the FT, WSJ, NYT, and more. They have been informed and relevant.

There have been a few threads by @michaelxpettis and commentary by @niubi well worth reading.
There has been recent news which deserves a bit more nuanced treatment because it looks, as of today, we may be getting a resolution sooner rather than later, which is only a little surprising.

Development #1: Sep contract sales have, it appears, fallen through the floor.
Read 32 tweets
29 Dec 20
Year-End Comments from An Independent Analyst (Thread)

1) Buy side does not make sufficient use of external expertise.

I publish research on events, special sits, catalyst-driven situations (which will include fundamentals) on @smartkarma and I note lots of HFs and LOs
(2/n) which do "fundamental" (whether "growth" or "value" biased) ignore the alpha available from special sits. They may not "do risk arb" but when a situation shows up on a portfolio name, they should understand how to best exit/play. They tend to think proprietary info about
(3/n) how/why they got IN for fundamental reasons gives them an edge on the non-predicted special sit. That's wrong.

The entire job of special sits players is to make money because others (those who do not respect the special sit) decide to trade at the "wrong price."
Read 16 tweets
28 Dec 20
Looking Inside the Diaper.

On 30 May 2019, I wrote about Sanyo Chemical (4471 JP) and Nippon Shokubai (4114 JP) as a Guess-The-Ratio trade. I liked both companies, but one wanted to buy Sanyo Chem cheap (1/n)

smartkarma.com/insights/sanyo…
(2/n) I recommended trading the range, buying the 4471/4114 ratio at 0.75 and possibly shorting it at 0.95.
(3/n): The summer passed and Sanyo Chem underperformed despite being cheaper, but as also noted in the first insight, Silchester was building a position in Shokubai. When it got to 0.75 in July 2019, that was time to buy.

Nippon Shokubai downgraded its forecast at end-Jul2019
Read 10 tweets
18 Nov 20
The Nikkei 225 is a weird and whacky index.

Locally it is sometimes referred to as the "Nikkei Dow" because it is price-weighted, like the Dow Jones Industrial Average.

Started many decades ago, the index was started by taking 225 stocks, adding up all the prices, and then
dividing by a DIVISOR to get to the index level on Day 1.

A stock's weight was price divided by the sum.

When one stock is taken out and replaced with another, you change the divisor on that day to make it the same as it would have been had the stock going out remained in.
All this was fine until Japan changed its Companies Act and decided that when a new company was formed, each share had a par value of ¥500 rather than the longtime value of ¥50.

That meant when a stock listed, it had fewer shares outstanding but a higher price. That meant the
Read 22 tweets

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