Recently, with the winding-up order of the Hong Kong court for China Evergrande Group officially landed, Evergrande's debt problem has once again attracted widespread attention. Many voices questioned whether Evergrande's dollar bonds were "domestic guarantees and foreign loans", and the United States did not have to pay for the debt collection in the end. These statements are misleading. In fact, there is no so-called "domestic guarantee and foreign loan" in Evergrande's US dollar bonds, and it will not be repaid in priority in liquidation.
What is "Overseas Loan under Domestic Guarantee"?Just give an example to make it clear
The so-called "domestic guarantee foreign loan" simply means that an enterprise uses domestic assets as a guarantee to lend overseas. For example, Evergrande wants to borrow $100 million from a U.S. bank, and can use a certain real estate project in Guangzhou as collateral and then get the loan. However, foreign banks are not very confident about the supervision of Chinese assets and are worried about the difficulty of debt collection in the future.
At this time, it is necessary for mainland banks to come forward to provide guarantees for Evergrande and issue letters of guarantee to foreign banks. When foreign banks saw the endorsement of domestic central enterprises, they were relieved to lend out US dollars. This is the basic model of "domestic guarantee and foreign loan".
But is this the nature of Evergrande's dollar bonds? The answer is no, and the main reasons are:
First of all, at the moment of tightening the financing policy, mainland banks do not dare to issue such a letter of guarantee to Evergrande. Evergrande itself is struggling to obtain financing, where is the loan guarantee? Moreover, if there is collateral to open a letter of guarantee, why bother selling US dollar bonds? It's all asking for trouble.
Secondly, the interest rate of Evergrande's dollar bonds is as high as more than 9%, which is 2-3 times that of central enterprises such as Industrial and Commercial Bank of China. If there is a domestic bank guarantee, is it necessary to offer such a high-risk interest rate? Evergrande's dollar bonds are essentially unsecured high-yield junk bonds.
In addition, foreign loans under domestic guarantee have always been only applicable to super large companies at the level of central enterprises in China, and with the strength of Evergrande, it is simply a fool's dream to ask for foreign loans under domestic guarantee. There is no evidence that Evergrande's dollar bonds have any explicit or implicit domestic institutional guarantees.
To sum up, the so-called "domestic guarantee and foreign loan" of Evergrande's dollar bonds is completely nonsense.
After Evergrande defaults, can the United States forcibly collect its debts?
Since Evergrande's dollar bonds are not guaranteed by the mainland, can US creditors really just watch Evergrande default? Again, the answer is no.
First, the Hong Kong court's winding-up order only concerns Evergrande's assets in Hong Kong, and Evergrande's most valuable properties are mainly in the mainland. The mainland courts preempted the action, and a large number of assets have been seized or frozen. It is unknown how much of the assets will be distributed in Hong Kong's liquidation.
Secondly, ensuring the delivery of the building is currently Evergrande's top priority. Evergrande has more than 600 billion yuan of housing delivery contract obligations to be fulfilled, involving more than 1 million houses. This is in the vital interests of millions of families and must be addressed as a matter of priority.
Finally, after the US dollar debt defaults, US creditors can also collect the debt through legal means such as litigation and asset seizure. The offshoring of Chinese assets has also limited the jurisdiction of mainland courts. Therefore, although the dollar creditors are in a weak position, they are not without tricks.
To sum up, although the dollar creditors are facing difficulties, they are far from helpless. After the liquidation of Evergrande, the delivery of the property and mainland creditors should be given priority, but the US dollar creditors also have certain means of debt collection, and they will not be wasted.
Will Evergrande give priority to repayment of US dollar bonds after liquidation?
The winding-up order of the Hong Kong court was unfavourable to mainland creditors, and the international reputational damage caused by the default of the US dollar bonds, there is a view that the repayment of the US dollar bonds should be given priority as a sign of goodwill. But in essence, this does not correspond to the actual situation of Evergrande.
First of all, US dollar bonds are high-risk bonds, and high yields correspond to high default risks, so investors should be risk-aware. Prioritizing the repayment of US dollar debts is unfair to mainland creditors.
Second, a large number of Mainland assets have been seized by the courts, leaving Hong Kong with limited assets at the time of liquidation. Even if you want to repay it first, you have limited funds.
In addition, ensuring the delivery of the building is the current top priority. Solving problems related to the interests of millions of families is even more important for social stability.
Finally, mainland creditors can protect their rights through legal means and will not get nothing. Only by treating different creditors fairly can we achieve the basic goal of resolving Evergrande's debt problem in a sustainable manner.
To sum up, theoretically speaking, it is not realistic to give priority to the repayment of US dollar debts in the liquidation proceedings of Evergrande Group. It is imperative to ensure the vital interests of mainland home buyers and maintain social stability. This requires the joint efforts of all parties and cannot only consider the interests of any one party.