Evergrande: TOO BIG TO BAIL

Evergrande and Chinese stocks seen tumbling in today's Hong Kong session:

Stocks accelerated dropping off a cliff in China after this news hit the wires:

In order to ensure fair information disclosure and protect the interests of investors, after the company’s application, all existing corporate bonds of Evergrande Real Estate will be suspended for one trading day from the opening of the market on September 16, 2021, and will be opened on September 17, 2021.

..and the Chinese Real Estate crashes further:

The major Chinese real estate developer Evergande built up a real estate empire making it the second biggest in China, controversially using the leveraged properties and US denominated junk bonds.

Assets and equity boomed over the past two years, but the net income somehow struggled lagging behind. The quantitative easing (QE) has supported economic growth, but also the over-leveraging properties and other bubbles on the market generating very little revenue to support the growth and diminish deflationary pressures. It worked till it didn't, right up until the pandemic broke out hurting the driving revenue foe Evergrande: commercial and tourism properties. At that time, Evergrande reportedly managed to rack up more than $300B USD in debt.

To put that in perspective $300B USD is the entire GDP of countries like Ukraine, Czech Republic, or Portugal. And that is just the *DEBT* that Evergrande has.

"Currently rumors are swirling that Evergrande may not even have enough remaining capital to service the interest payments on their loans nevermind paying down their principals.

Now, the real estate developer claims they are going to liquidate property to get 'operations back on track' But, those of us in the crypto market understands how liquidations work.

If you are a liquidating because your collateral asset (real estate property) has sunk in value, and you have to sell that asset to pay back, then every time you sell it, the asset drops further," - Adam Cochran tweets

Adding to the pain, contagion concerns from Evergrande is making it more difficult for Chinese developers to refinance, despite a “critical” need to do so, according to Citigroup. Bond issuance is trickier onshore due to lower demand, and offshore due to increasing costs, they wrote in a Wednesday note. As ZeroHedge showed earlier this week, yields on China’s high-yield dollar have exploded rose to 13.7%, the highest since last year’s March market meltdown.

Photo: ZeroHedge

Evergrande is so big they will be in a race to the bottom as they'll be selling real estates which will dump the average price of properties, thus lowering their asset value and entering into a never-ending spiral. Evergrande reportedly owns a whopping 2% of all Chinese real estate market and so this has lead Chinese issued bonds from nearly all real estate developers to sink. However, Evergrande itself has been diving off a cliff all year and has reached a critical point. Now creditors are unwilling to accept their bonds and demanding payments made and aggressive restructuring options are being reviewed, Adam Cochran tweets.

On September 15, 2008, Lehman Brothers collapsed dissolving $600B in US assets leading us to the worst market crash since the great depression. $600B in assets.

Right now, Evergrande holds $200 billion in assets, and further $300B in additional unserviced debt: so it makes $500 billion in total. So its entirely on the same level as the assets that Lehman Brothers had. But, Lehman Brothers was a US bank broadly diversified across many industries. Evergrande is not. Evergrande is in one industry and only one industry. And its debt is held by banks across China, the US, Canada, UK, Australia and Europe.

This also comes at a time when markets have been on an artificial, inflation driven, quantitative easing fueled run up like no other. So when the hammer does drop, it will drop hard. But, this will not only cause defaults on bonds, but it will mean billions of dollars unpaid to Chinese contractors and goods suppliers, and it will mean the largest ever bulk real estate liquidation ever if Evergrande goes under. That real estate collapse would mean the asset sheets of other real estate developers, banks and mortgage companies in China would all crumble. Remember the big empty houses in the US in 2008? That times 100x. - Adam Cochran tweets.

Here comes a quick refreshing reminder that China is holding over 15% of all global debt.

The large correction in junk bonds market is not a matter of if, it is a matter of when, and how severe. The shockwaves would be felt in markets around the world, mostly in banks and funds, but Adam Cochran suggests it may touch crypto assets as well. He accomplishes his bearish outlook: "While we can hope that crypto one day becomes a flight from the tradfi markets, right now its sufficiently intertwined to its movements. Plus, there is the stark reality that this will have a huge impact on the commercial paper markets. Regardless of what commercial paper you hold, bonds and commercial paper would take a hit and some issuers may even fold. Currently both Tether and Circle hold commercial paper, and while I think it unlikely that either would have large swaths of Evergrande bonds, the whole market will reel a bit."

A definite bearish trend is evident, the meltdown in junk bonds will be really bad, the main media is slowly picking up the obvious Evergrande story.

TOO BIG TO BAIL