SOFT default of Evergrande

Evergrande is in a 'soft' default scenario where Beijing has sent the provincial government teams to take over the business, lead asset sales, and facilitate a debt restructuring. Banks have been given the green light to allow Evergrande to renegotiate specific payments under certain conditions, eventual recovery for unsecured creditors. In a Western-style restructuring, the recovery value would probably be zero. But based on past precedence, the recovery value is below the trading levels on Evergrande’s offshore bonds, which recently traded at 20 cents on the dollar, or a haircut of 60-70 points on a net present value. The outright bailout of Evergrande doesn't make sense to Beijing that will chop the real estate giant to smaller pieces distributing them only to state-owned companies.

The embattled Chinese property giant Evergrande missed a deadline this week on interest payments to offshore bondholders, entering a 30-day grace period with its $305 billion total debt load with a painful restructuring ahead, leaving the current bond holders deal with the delay.

The biggest Chinese developer, after plunging 82 per cent and losing $20 billion of value, sending offshore bonds to distressed levels, Evergrande has run out of cash.

This week's deadline has come and gone, and cash-strapped Evergrande keeps silent on whether the closely watched payment would be ever done in the next 28 days. What has rapidly become Asia's biggest corporate headache has now smashed consumer confidence in Chinese property investment.

HSBC and StanChart will face the market meltdown first as they have been those foreign banks with most involvement in underwriting syndicated loans for local property developers.