U.S. stock futures sold off Monday morning, tracking declines in overseas equities as investors nervously eyed the potential ripple effects of the default of a major Chinese real estate company and ongoing debates over the debt limit in Washington.
Dow futures sank by more than 500 points, or 1.6%, in early trading. S&P 500 futures also dropped by more than 1%, adding to losses from last week. The CBOE Volatility Index, or Vix (^VIX), jumped by more than 30% as a confluence of concerns roiled markets.
Shares of China Evergrande Group (3333. HK) plunged by more than 10% on the Hong Kong Stock Exchange as fears mounted that the Chinese real estate juggernaut would collapse under a major debt burden, impacting shareholders, bondholders and potentially triggering turmoil elsewhere across global markets. The specter of a broader crackdown by the Chinese government on Hong Kong’s real estate sector further added to concerns.
Evergrande has been scrambling to raise funds to pay its many lenders, suppliers, and investors, with regulators warning that it’s $305 billion of liabilities could spark broader risks to the country’s financial system if not stabilized.
“The stock will continue to fall, because there’s not yet a solution that appears to be helping the company to ease its liquidity stress, and there are still so many uncertainties about what the company will do in case of a restructuring,” said Kington Lin, managing director of Asset Management Department at Canfield Securities Limited.
Lin said Evergrande’s share price could fall to below HK$1 if the company is forced to sell most of its assets in a restructuring.
One of Evergrande’s main lenders has made provisions for losses on a portion of its loans to the embattled developer, while some creditors are planning to give it more time to repay, four bank executives told Reuters.
Policymakers are telling Evergrande’s major lenders to extend interest payments or rollover loans, and market watchers are large of the view that a direct bailout from the government is unlikely.
The People’s Bank of China, its central bank, and the nation’s banking watchdog summoned Evergrande’s executives in August in a rare move and warned that it needed to reduce its debt risks and prioritize stability.
Evergrande is due to pay $83.5 million interest on Sept. 23 for its March 2022 bond. It has another $47.5 million interest payment due on Sept. 29 for March 2024 notes. Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.
In any default scenario, Evergrande will need to restructure the bonds but analysts expect a low recovery ratio for investors. Trading of the company’s bonds underscored just how dramatically investor expectations of its prospects have deteriorated this year.
Goldman Sachs said last week that because Evergrande has dollar bonds issued by both the parent company and a special purpose vehicle, recoveries in a potential restructuring could differ between the two sets of bonds, and any potential restructuring process may be prolonged.
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