So Evergrande has started to default on payments, some people who were owed coupons today haven't received them.

The headlines early today was that the government told each province to send in accountants to evergrande offices in their local territories to get a better understanding of what they own/owe and to start taking over properties.

They have a net debt to equity ratio of 99.9%, the Chinese requirement is 100%, which seems alot like a student passing with a 50% grade:)

Furthermore, they've started to offer properties to employees at 50 cents on the dollar to pay off debts, which gives you a pretty good idea of how they've overvalued their current assets and their current net debt to equity is probably even more offside than imagined. The good news for employees is that the CCP has already said that they would force Evergrande to prioritize payments to employees and suppliers over creditors to help keep social order in the country.

Equity holders will almost certainly face a zero, though the Hong Kong version of the stock is up 40 cents today, so never take advice from me I guess:)

The problem now for the Chinese government is that the easiest way for evergrande to raise capital is to sell assets, but the easiest assets to sell are its good cash flowing assets, which helps pay short term coupons but will just kick the can down the road a few months to a year.

it also doesn't help that any selling will lower residential housing prices in China, which has been a main driver of their GDP, and the main driver of Evergrande's growth so the assets they dont' sell will be worth even less and there will be fewer residential buyers out there, leverage unwinding really sucks!!

A bigger issue is spill over to other property developers as there never seems to be one that isn't fully loaded up on debt. If evergrande goes on a fire sale of assets to raise cash then it by default pushes down the value of other developers properties and changes their net debt levels which wil almost certainly force them to become forced sellers as well and the feed back loop continues down as there isn't really a buyer of last resort other than the government.

To give you an idea of the problem the 4 largest property developers in China have outstanding liabilities of about $1Trillion, that's not a typo....

What the west is waiting for is to see if China selectively allows Evergande to default on their debt by forcing them to pay local holders first and foreigners second, or not at all as their current cash flow situation dictates.

As best I can tell Evergrande has about $20B in debt off shore from China, with the vast majority of it held in Europe and North America.

There is some talk that this could force China to pull back its capital from the west like Japan did in the 90's causing some drag on western economies, most likely in the property market, man Canada could use this right about now, but this seems really unlikely as I'd assume a real crash in China may force the wealthy in China to seek to put even more assets outside of the country.

No matter the outcome, evergrande is probably done as a company, due tot he fact that property developers live on debt and no one is going to lend to them anymore, well unless the CCP forces them to.

Edits

- PBOC(CCP) just put in $17B of liquidity into their credit markets between 7 and 14 day repo agreements, the most in a year. Everyone is waiting to see if they pay the $88M on a 5 year note that is due today, normally the coupon would have been paid already if due today.

- next Thursday they have a payment due on a $2B offshore bond and a $48M payment due.

All these bonds have a 30 day grace period to pay the coupon before they are considered to be in default.