Alice Huang, Dorothy Ma, and Pearl Liu of Bloomberg report on how a 99% bond wipeout handed hedge funds a harsh lesson on China. They write:
From afar, China Evergrande Group had all the makings of a killer distressed-debt trade: $19 billion in defaulted offshore bonds; $242 billion in assets; and a government that appeared determined to prop up the country’s faltering property market. So US and European hedge funds piled into the debt, envisioning big payouts to juice their returns.
What they got instead over the course of the next two years is a harsh lesson in the dangers of trying to bargain with the Communist Party. The talks are now dead — a Hong Kong court has ordered Evergrande’s liquidation, and the bonds are nearly worthless, trading in secondary markets at just 1 cent on the dollar. […]
“Authorities are not likely to allow offshore claimants to secure valuable onshore assets while effectively insolvent developers struggle to meet politically tense onshore obligations,” said Brock Silvers, managing director at private equity firm Kaiyuan Capital. “This is a serious setback for China’s still-developing credit markets and can only exacerbate declining market sentiment as foreign capital increasingly seeks lower risk outlets.”
Read more here.
