Highlights:

• Evergrande has missed a coupon payment on an USD bonds this Thursday 23rd of September. It is now entering a 30- day grace period to potentially pay the amounts due, otherwise the coupon miss will trigger a technical default on the offshore debt. Sentiment is likely to remain weak until a solution emerges. Dollar bonds are currently pricing a 75% haircut, in line with a debt liquidation scenario while a debt reprofiling (maturity extension, debt to equity swaps) appears more likely to us and would imply higher bonds prices. 
• Evergrande is not a Lehman moment: As much as we believe Evergrande’s equity and bondholders will bear the brunt of the burden, we view it as unlikely that this would trigger a global and systemic crisis, given the nature of its activities are less systemic than that of the financial sector. The amounts to be written-off look manageable. 
• The Evergrande story adds to the risks of a sharper cooling of the real estate sector and the overall Chinese economy. Beijing’s introduced several policies to deleverage the real estate sector. The main tools are the “Three-Red-Lines” approach and lending caps by the PBoC. 
• The Chinese government wants a/ credit risk to be better priced, b/ to cool down property speculation and prices and c/ protect homebuyers. But it wants to avoid a property crash that would reverberate through both households (wealth effect) and the financial system (bad loans) and make the crisis systemic. So, bond holders will bear some pain, but China will work hard on avoiding detrimental chain effects. 
   

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