By Stan Szymanski
As a young musician in Pittsburgh I was blessed to learn how to play jazz by going to a ‘session’ every Thursday in the North Side that was led by Randy Purcell (trombone-Maynard Ferguson) and his brother Rick (keyboards/vocals). They shepherded me over the course of a little over a year of navigating the standards of the American Songbook.
At the end of every Thursday night session Randy would call -one- song: The Party’s Over. That was a sure call that it was time to pack up and go home. In that spirit, the financial condition of Evergrande has tuned on the lights to show everything for what it really was and is shutting down the bar, the well if you will, that the debt-drunken investors of the world have imbibed in for so long.
Yesterday, according to a Reuters article: …’The company, reeling under a debt pile of $305 billion, was due on Wednesday to make a $47.5 million bond interest payment on its 9.5% March 2024 dollar bond, after having missed $83.5 million in coupon payments last Thursday.’…
Ok, so there is 131 million dollars in interest payments that Evergrande has not paid to foreign investors in the last six days. If they can’t pay their interest payments on time why would anyone think that they will get their money back when Evergrande bonds start to mature in March 2022? What about the $162.38 million in dollar denominated interest in the next month?
Reuters also reported yesterday that Evergrande sold a $1.5 billion stake in a bank to repay a large lender to whom they owe $7 billion. Evergrande has debts of over $300 Billion. Evergrande stock initially went up on this news before closing lower for the day. The Chinese government bought the stake from Evergrande. When you owe $300 billion, the $1.5 Billion that you can scrape up for payment goes to the people (club owners) that always make sure that they get ‘theirs’-In China that’s known as ‘the party’. If -any- of that $1.5 Billion ends up in the hands of foreign investors it would be a miracle after missing two dollar denominated interest payments.
It may just be that the unfolding Evergrande debacle is the opening melody to the tune ‘The Party’s Over’ in the US financial markets. Evergrande’s non-payment of interest slaps the face of investors who were lulled into thinking that High-Yield bonds posed very little risk. The spread between High-Yield and U.S. Treasuries shrunk as Mish Shedlock at ‘Mish Talk’ wrote less than three weeks ago (‘The Corporate Junk Bond Bubble In Two Pictures‘): …’We are at or near the record lows across the most speculative indices.’…’The spread between high yield (junk) and BBB (investment grade debt) is 1.93 percentage points. It was much lower in May of 2007 at 1.35 percentage points.’…’Spreads however are a bit misleading because they mask absolute yields.’… and elsewhere in the article …’For example, although the High Yield to BBB spread fell to 1.35 percentage points,the BBB Index was at least 5.96% (during the financial crisis of ‘07/‘08) vs 2.24% now.’…’But not even that nearly 6% yield save BBB bonds in housing bubble bust.(referring to the 2008 financial crisis)’…and finally…’In November of 2008, the BBB yield soared to 9.91%’…
Thank you Mish. That means that in September 2008 an average rate of almost 6% on investment grade debt (wouldn’t that be nice today?-fat chance) could not rally enough interest from investors to buy investment grade debt as in November 2008 rates on that same debt averaged 9%! That means that there was a tremendous sell off (prices of the bonds went down) of investment grade debt when Lehman was going bankrupt as well as a whole host of other problems that presented themselves at that time.
As has been stated by many market observers, Evergrande is 5 to 6 times the size of Lehman. It is entwined in the world financial system. It has missed its last two of its dollar-denominated interest payments in the previous week. It has -apparently- made good on only 10% of its current wealth management products domestically (inside China). How will it pay off the principle of the dollar denominated bonds that start to come due in just 6 months?
What does this mean for your 401(k), your pension, your stock and bond portfolio and the solvency of your bank?
I write about these things because in my humble view it could mean humiliating valuations in the aforementioned financial vehicles. I do not want to see people that have worked their whole lives, the retired or those who use their resources to care for the disabled hurt by the mismanagement by irresponsible people who run things. Tangibles will help see you through-Food, water, energy, shelter, means of protection and for those who have the means, physical precious metals (in your hand-not mutual fund or ‘paper’ promises), as they have been money for 5000 years.
And as I reminisce, I can hear Randy playing the pick up notes to start that fateful song…
