It’s common for conglomerates to raise debt funding via multiple subsidiaries or special purpose vehicles. Often, these have different names. The beleaguered China Evergrande Group (03333) is no exception. What are some of the issuers believed to be connected to Evergrande? And who owns the bonds?
One of the issuers is Hengda Real Estate. According to Evergrande’s annual report, Evergrande owns close to 60% of the onshore subsidiary, Hengda Real Estate. The firm is a Shenzhen-based unit that has issued Renminbi-denominated bonds. The coupon payment due on Wednesday came from the five-year bond issued by Hengda with an RMB 4 billion principal value, which is due in September 2025.
A second such issuer is Scenery Journey, which is owned by Hengda through a holding company called Tianji Holding Limited. According to bondsupermart, there are four outstanding bonds issued by this subsidiary, which are due between October 2022 and November 2023. Unlike bonds issued under Hengda, which are in RMB, Scenery raises money by issuing bonds in US dollars, from offshore investors.
Earlier this month, Fitch Ratings downgraded the Long-Term Foreign-Currency Issuer Default Ratings (IDR) of China Evergrande Group and its subsidiaries, Hengda Real Estate Group and Tianji Holding, to reflect Fitch’s view that a default of some kind appears probable. “We believe credit risk is high given tight liquidity, declining contracted sales, pressure to address delayed payments to suppliers and contractors, and limited progress on asset disposals,” Fitch noted.
In the broadly tracked JP Morgan Asia Credit Index – Non-Investment Grade Total Return, China Evergrande Group has a weight of 1.5% while Scenery Journey takes up another 0.66% (as of the end of August), according to information provided to Morningstar by fund managers in our coverage universe.
Earlier this week, Morningstar talked about how much the six largest Asian high yield bond funds owned of Evergrande's issuances. This covered only the bonds issued directly by the Hong Kong-listed Evergrande. Today, we take a look at bonds issued by both Evergrande (EVERRE) and Scenery Journey (TIANHL). We also walk through how much of these biggest Asian high yield funds own.
Scenery’s bonds have been issued with a ‘keepwell agreement’. A keepwell agreement is an agreement between a parent company and its subsidiary that financial solvency will be kept through the agreed upon term. These agreements boost confidence in shareholders and bondholders that the subsidiary will meet its obligations. The contact is often seen as a “gentleman's agreement” where Chinese company (the issuer) pledges to keep a bond-issuing offshore subsidiary solvent. This does not guarantee any payment to the bondholders. All of these clauses ultimately depend on the contractual definitions, and the triggers of a default.
As of September 23, the TIANHL bonds that mature on October 24, 2022, and November 6, 2022, are trading at 18.21 cents on the dollar. The EVERRE bonds, due March 23, 2022, and January 22, 2023, are trading 28.50 and 25.21 cents on the dollar, respectively.
Among the funds with the latest data through July, all but HSBC hold both the direct exposure to China Evergrande Bond and the notes issued by Scenery Journey.
Who Owns What?
In the five funds (with data through July 2021) that we featured in the previous article, most had Evergrande exposure in the region of 1%. Allianz Dynamic Asian High Yield Bond had a bigger weighting of 2.56% as of the end of July.
These funds also had additional holdings in Scenery, ranging between 0.32% and 1.16%. HSBC GIF Asia High Yield Bond was the only exception, as it exited all positions of Scenery, retaining its 1.22% Evergrande assets in its portfolio at the end of July.
Among all the featured funds, the BlackRock portfolio absorbed the highest level of both Evergrande and Scenery bonds. The total market value of the combined Evergrande and Scenery holdings is almost double that of the January figure. In recent months, the trend seemed to be steepening, as the managers continue a consistent bond top-up, favouring the Scenery issues.
At the end of August, the BGF Asian High Yield Bond fund had a total of 1.76% invested in bonds related to the Evergrande complex. Scenery represents nearly half of the exposure, or 0.76%.
Note: The freefall in bond value has effectively reduced the overall portfolio’s exposure to the name.
The case at PIMCO differs. The PIMCO managers gradually accumulated Evergrande’s bonds. Its holdings have been brought back to near early 2021 levels.
In Fidelity’s portfolio, the total exposure and the market value of Evergrande bonds are on the decline, like most of its peer funds. Moreover, the fund with US$ 4.7 billion under management is the only portfolio that has trimmed Evergrande exposure by half, and shifted to hold more TIANHL bonds through July, compared to January 2021.
It’s worth noting that all of the below funds hold the bond with coupon payment due September 23 (ISIN: XS1580431143) based on the latest data available.
