I keep seeing people post about Evergrande making interest payments on time and that the world is good again. I used to work on a bulge bracket Asia HY bond desk and this is not the case.
Twitter and the Media is missing the full picture and no one has pointed it out yet. 👇
We aren’t fully out of the woods. There is a difference between onshore (denominated in CNY) and offshore bonds (USD). Evergrande has offshore coupon denominated in USD due Sep 23 and have yet to make an announcement on those. Given a choice, they would pay onshore first. Should they decide not to pay USD, this will hurt global investors regardless. That said, there is still a 30-day grace period so it’s not end of the world, even if they don’t.
The CCP won’t directly step in but they will save the house buyers in the case of a default (so they don’t see any protesting etc). SOE banks will be the first to get screwed and majority of loans/commercial papers are to them. The scary part is that we’re not too sure how many of these guys re-levered this debt into other instruments so there may be ticking bombs all around.
Ultimately, the nearest USD coupon that is due is on Sept 23rd (Thursday), roughly equating to US$100m in interest. Sure, you may meet that interest but the company still has $300bn of principal coupon worth to pay.
Personally, I see a few routes moving forward but one needs to look at the debt structure (1). horizontally (time-based) and (2). vertically (who and what type of debt do they hold) to see a better picture.
Horizontally: - Sept 23, $83mio in interest due - Sept 29, $45mio in interest due - Oct 11, $~160mio in interest due - Nov 6, $80mio in interest due - Dec 28, $250mio in interest due
Vertically: - 54% of its $300bn are in secured borrowings - 2% are convertible bonds (lower pecking order) - 21% are senior notes (this is mostly held by UHNW individuals and big funds/banks) - 6% PRC bonds (local onshore denominated debt) - 17% Unsecured direct bank borrowings (mostly to SOE banks)
That said, my gutfeel is that the CCP will go in indirectly via the SOE banks taking the brunt of the hurt; they’ll likely working their butts off now with some meeting of sort with all EVERRE’s biggest debt/equity backers. The key players in this game are:
[In order of importance to the CCP]. 1. People who bought homes (they will be taken care off first) 2. Suppliers and construction companies contracted (perhaps this may be next) 3. Public debt holders (UHNW/Funds/Banks) – the key people here are the funds/banks 4. SOE banks who provided direct loans (govt backed anyways) 5. Equity holders.
My guess at the end: some SOE banks come in with some package to save certain pieces of the above pie. Perhaps the CEO/management team gets reprimanded strongly? Either ways, this is the largest elephant in the room now and the Crypto market is worried of the repercussions and quakes that we could feel from this fallout.
That said... enough about Evergrande, Crypto is dealing with its own troubles. Messari's Mainnet event got hijacked by a SEC subpoena, Mr Gensler called stablecoins 'poker chips' (we get it), and Binance derivatives service got clamped down in Australia.
On-chain data wise: During the dip, BTC's LTH-SOPR (1.26) vs STH-SOPR (0.97) indicated short-term holders (speculators, swing-traders, etc.) sold into losses, while long-term holders took profit. Regardless, the stablecoin supply ratio fell, and the exchange reserves of BTC is nearing a six-month low. This suggest traders are flushed with cash, but whether they are willing to step in (presumably on long leverage positions) is another question. For the second day, BTC Long liquidation also indicated a sharp up spike relative to the past 12 days while the estimated leverage ratio hovered at the mid-point (relative to the past two weeks), suggesting a very risk-off environment.
In derivatives: BTC and ETH option contract open interest held constant while traders adopted a wait-and-see approach to prices. Options skew indicators reflect a different story: 25% delta skew (Volatility premium for puts to calls), a significant jump, reflecting a high belief among option traders that further downward movement is imminent. Coin days destroyed also show that the move was mostly driven by short-term traders.
Personally, I like to fade such event-driven markets (but only post FOMC). Just note that conditions are primed such that if we get very positive news, people are flushed with cash for a jolt back to risk. A gentle nudge to also remember just how short-term market participant thinks, and that one only needs to look just over the ridge to stay ahead. IMO, the Evergrande fiasco is starting to look more like a very controlled detonation by the CCP - even if their offshore entity defaults (after the 30-day grace period), it won’t trigger a cross-default to its onshore entity. Finally… I actually took Gary Gensler Washington Post interview early this morning to be bullish for Crypto long term. We certainly need certain aspects of the market to be reined in to progress further. Have a good one!
- I write daily thoughts on Bitcoin/Crypto/TradFi for fun on Telegram too but I’m looking to start here! Some redditors have posted on my behalf on other channels too / most of which I can’t due to the lack of karma 😂
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