Evergrande Bondholders Mull Next Steps in Wake of Missed Payment

Evergrande has a 30-day grace period before its nonpayment constitutes an event of default on its bonds. Lawyers see last week’s payment miss as the prelude to a complex restructuring of Evergrande’s roughly $304 billion in liabilities, which include more than $19 billion in outstanding dollar bonds.

Investment funds that own the bonds have been seeking to understand their options, and are talking to various lawyers and advisers. Over the past week, some U.S. asset management executives have informally reached out to their contacts in the Chinese government, hoping to better understand Beijing’s end-goal for Evergrande and figure out their next steps, said a person familiar with the matter.

A wild card hanging over the proceedings is how the Chinese government will handle a potential collapse of the developer.

“It’s not a matter of what the value of the assets are and how much of a recovery should be granted to bondholders,” said Karl Clowry, a partner at the London-based law firm Addleshaw Goddard LLP, who represents a number of offshore bondholders. “It’s more a matter of how much the Chinese authorities and large onshore stakeholders will allow foreign bondholders to receive.”

Evergrande’s 8.25% bonds that didn’t receive coupon payments last week have been trading around 29 cents on the dollar, a price that implies investors expect to recover less than a third of the bonds’ original value.

Beijing has so far signaled it is likely to give priority to domestic interests that could be impacted by Evergrande’s failure, such as suppliers who haven’t been paid, employees who lent money to the company, home buyers who paid deposits for yet-to-be-finished apartments, and Chinese banks and investors.

While Evergrande failed to pay the most recent interest payment on its offshore bonds, its main property unit reached a private settlement with holders of its onshore bonds that also had a coupon payment due last week. It didn’t say if it settled that payment with cash or other assets.

Funds managed by BlackRock Inc. and Ashmore Group are among the holders of Evergrande offshore bonds, according to public filings. HSBC Holdings PLC’s asset management arm used to hold Evergrande’s bonds, but has sold all of its holdings in the past six weeks, according to a person familiar with the matter. BlueBay Asset Management LLP is in the group of bondholders that expect to negotiate with Evergrande, according to people familiar. BlueBay didn’t have a comment.

China Evergrande is incorporated in the Cayman Islands, and has some subsidiaries incorporated in the British Virgin Islands. The conglomerate has some assets in Hong Kong, such as an office building and stakes in two publicly listed companies, but most of Evergrande’s assets are in mainland China.

It could be difficult for Evergrande’s offshore bondholders to have their claims recognized by courts in mainland China, said several lawyers tracking the situation.

Offshore bondholders might first try to pursue their claims through courts in the Cayman Islands or British Virgin Islands, where Evergrande’s companies are registered, according to Dennis Hranitzky, a lawyer at Quinn Emanuel Urquhart & Sullivan LLP who is tracking the situation.

Since the bonds are governed by New York law, bondholders could consider filing a claim in a New York court, he said.

The bonds that Evergrande failed to pay the interest on last week, like most of its other offshore bonds, have a provision in their credit agreement concerning missed payments. Following the 30-day period after a payment miss, bondholders may declare a default by sending a written notice to the bond’s trustee, Citicorp International, a division of Citigroup Inc.

However, holders of at least 25% of the outstanding principal amount of the bond would have to organize to meet the threshold for the written notice to be considered.

But even if a court in New York, the Cayman Islands, or the British Virgin Islands granted bondholders a judgment of an unpaid amount, they would have to take those judgments to China and attempt to enforce them there, Mr. Hranitzky said

“It is famously difficult to do,” Mr. Hranitzky said, noting that there are no treaties in place that would obligate a Chinese court to recognize those courts’ judgments.

Offshore bondholders may instead look to file claims in jurisdictions that would have a better chance of being recognized, such as in Singapore or Hong Kong, where some of the company’s securities are registered.

Some lawyers and investors also expect Chinese authorities and Evergrande to devise a restructuring plan that will not leave offshore bondholders out in the cold, given the potential implications on other developers and private-sector companies that have issued dollar bonds and would need to refinance them in the future.

“International bondholders will be a lower priority, but they will be a consideration,” said Alexander Aitken, a partner at law firm Herbert Smith Freehills in Hong Kong. “I don’t think the Chinese government would want an outcome that resulted in Chinese private companies having no or limited access to the global debt capital markets,” he added.

Evergrande could offer offshore bondholders some sort of compromise, such as a tender offer that would provide some recovery to the bonds, said Susheel Kirpalani, another lawyer at Quinn Emanuel, The fact that Evergrande hired Houlihan Lokey Inc., a well-known American investment bank, would indicate that the company may seek to engage with its offshore bondholders, he added.

“There are signals that Chinese authorities are becoming more involved in Evergrande’s restructuring, which points to an increasing likelihood of an orderly process. This should benefit all creditors,” said Paul Lukaszewski, head of corporate debt for the Asia Pacific region at asset-management firm Abrdn, who is following the situation.

Evergrande’s electric-vehicle business warned this week that it was running out of cash. A person advising a group of bondholders sees this development as a possible sign of internal contagion where the company’s problems in its property division may be spilling into other parts of its business.

—Dawn Lim, Anna Hirtenstein and Serena Ng contributed to this article.

Write to Alexander Gladstone at [email protected] and Frances Yoon at [email protected]