Business: I think Evergrande will eventually default

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Evergrande is on every financial news headline for the past week.

Although for the past few days, rumor has it that the government regulatory body is planning to help the company pay its debt, there is still much uncertainty ahead. 

Personally, I think this Evergrande event will turn out to be a massive mess up. Here is why.

I guess that if you are a financial regulator there is something to be said for taking an inscrutable tough-love approach with companies that run into trouble. I can imagine the conversation between the company and the regulators goes like this:

Company: We are almost out of money and have so many creditors. Should we prioritize delivering products to customers, or paying suppliers, or making payments on debt to local retail investors, or making payments on debt to offshore bond investors?

Regulators: YES.

Company: …

Regulators: …

Company: Ok, good one… but seriously we can’t pay everyone.

Regulators: TRY.

What is the benefit, to the regulator, of saying “if I were you I’d pay the retail investors and stiff the offshore ones”? Why would you want to sound like you approve of stiffing anyone? You want the company to feel bad about all of this, to be nervous; you don’t want to be too quick to bless a plan to wriggle out of any debts. I’m not sure that that’s exactly what this is, though it kind of sounds like it:

“Financial regulators in Beijing issued a broad set of instructions to China Evergrande Group, telling the embattled developer to focus on completing unfinished properties and repaying individual investors while avoiding a nea-term default on dollar bonds…. In a recent meeting with Evergrande representatives, regulators said the company should communicate proactively with bondholders to avoid a default but didn’t give more specific guidance, a person familiar with the matter said. The developer has an $83.5 million coupon due Thursday, with a 30-day grace period to make the payment… There is no indication that regulators offered financial support to Evergrande for the bond payment, and it’s unclear whether officials believe the company should eventually impose losses on offshore creditors. Policy makers are trying to learn more about who holds Evergrande’s bonds.”

Focus on delivering properties to customers and paying individual investors, but don’t default on your offshore bonds either. Just try not to be in trouble anymore? I guess “avoiding near-term default on dollar bonds” is the softest ask there. “Get dollar bondholders not to complain for a couple of weeks, then default on them” is one possible interpretation of that one. If you are a dollar bondholder and Evergrande calls you after this meeting to say “hey just jive us two weeks and we’ll have your money,“ do you believe them?

Well, I don’t.