Thread by @bauhiniacapital

Brief thread on Evergrande:

Great article. Lots of color.

This is playing out very much as one would have thought (and did) in summer.

wsj.com/articles/everg…

The government has been insisting on a "market-oriented approach" which is a signal they won't publicly bail out the company's capital providers.

In Jully the govt charged the Guangzhou govt with "coordinating" the efforts between creditors and suppliers and the company.

In early August, the Guangzhou intermediate court was charged with being the hub for all debt-related cases against Evergrande.

https://twitter.com/bauhiniacapital/status/1423505479301435394?s=20

But the clear insistence from the State Council, leaders, and PBOC has been that Evergrande needs to deliver homes to buyers who paid.

That means it has to be kept alive. Kind of.

Or arrangements need to be made to have other companies take over their projects.

There was a piece of research on Evergrande in August which talked about Evergrande's quantum existence, like Schrodinger's Cat. It was in the box but you didn't know whether it was alive or dead (with the idea that you wouldn't until the box is opened).

Authorities are keeping the box closed as long as they can.

A default would cause the box to open. And the govt would have to step in to pay either through govt-led DIP financing or similar. That would look bailout-ish.

The noises we have been seeing recently - pressure in

Sep and Oct to loosen mortgages, pressure on banks to roll loans to projects, pressure on banks to ensure no leakage from escrow accounts, but aggressive payments to suppliers according to escrow account rules, etc have resulted in talk the last few days that banks are being

pushed to ensure adequate funding to keep things alive as long as there is sufficient collateral. The goal is, of course, to ensure that the populace starts buying properties again.

The problem is timing.

The introduction of property tax along with existing caps on secondary

housing prices means home buyers (*especially* upgraders) have an incentive to wait for those who should not have multiple homes (and who would get caught in a property tax) to start selling.

The combination of the 3RL, "common prosperity", and property tax hurts the developers

who make it their business model to sell luxury properties at luxury prices, or to sell "investment properties." A bunch of the developers who have defaulted are in the first category. Evergrande is in the second.

Right now there is a flow into stock problem for the capital of

real estate developers in China. Longer-term, there is a flow-into-stock problem based on business model, efficiency, and waste.

None of this means that Evergrande equity is not eventually a goner, or that bonds will not take a beating or eventually default.

But if the GZ govt needs to buy time to get itself organized behind the scenes - something a bunch of us warned about months ago - then it isn't surprising coupons would get paid.

With so many projects and so many bills, private financing, different levels of seniority,

it makes no sense for any private entity to jump into a project takeover without having done all the due dili.

That bit takes time.

Evergrande's USD bond payment schedule is "easy" through about late Jan 2022. THEN it gets tougher.

In the meantime, w/r/t default noises, I don't know whether there are any accounts who did not get their $$. If they did not, that constitutes Event of Default"under the ALL the Notes.

But anyone claiming EoD on other Notes would have to prove on these.