Evergrande pain spreads to wealthy investors as more payments missed

Rich trust buyers join 70K retail investors who suffered losses and want their money back

Tens of thousands of Chinese households who bought high-yield investments risk being sucked into the spectacular unraveling of China Evergrande Group after the embattled developer missed payments on funds sold through shadow banks, which have funneled billions into its construction projects.

Some of these lenders, known as trusts, have already dipped into their own pockets to repay wealthy investors on Evergrande’s behalf, according to people familiar with the matter. Others are negotiating payment extensions with Evergrande, said the people, asking not to be identified discussing private matters. It’s not clear how much of the funds are in arrears and there’s no evidence that trusts are passing payment delays on to customers who bought fixedincome products tied to Evergrande.

Already, missed payments on 40 billion yuan ($6.2 billion) of wealth products sold by Evergrande itself to retail investors have sparked nationwide protests, putting more pressure on Beijing to find a solution and avoid further unrest. Contagion into the $3 trillion trust industry will put at risk many more investors, while also threatening the biggest source of non-bank funding for the property sector as shadow banks retreat.

“The Chinese government will place social stability as one of the priorities,” said James Feng, the founding partner of Poseidon Capital Group, a Chinese fund that specializes in distressed and special situation investments.

The clock is ticking for Evergrande to make these investors whole. The cash-strapped firm faces repayments in the fourth quarter on $1.8 billion of high-yield products sold through trusts to wealthy clients and institutions. Another $4 billion is due next year, according to data provider Use Trust. The Chinese government, concerned about preserving financial stability, has pushed Evergrande to meet its many obligations. In a recent meeting, regulators urged the company to complete unfinished housing projects and repay retail investors, while averting a default on its dollar bonds. Evergrande’s billionaire Chairman Hui Ka Yan meanwhile told staff last week that buyers of its investment products will be repaid, the company said.

Yet with more than $300 billion in liabilities and cash flow shrinking, it’s not clear how Hui can pull that off. The company already missed a Sept. 23 deadline to make an $83.5 million coupon payment on a $2 billion bond maturing in March. The firm is also subject to heightened restrictions on its bank accounts as regulators ensure it uses cash to complete housing projects and not to pay creditors. The stock and bonds are reeling.

Evergrande's 8.25 per cent bond due 2022 indicated down 0.5 cent on the dollar Monday at 28.4 cents, according to Bloomberg-compiled prices. The stock rose 2.5 per cent in Hong Kong, paring its decline to 84 per cent this year.

Evergrande’s dependence on trusts and other asset management products began growing after banks were directed to cut back on their lending to the property sector. By the end of 2019, Evergrande had done business with most of the 68 trust companies in China, which accounted for 41 per cent of its total financing, based on the last borrowing disclosure.