Vehicles drive near unfinished residential buildings from the Evergrande Oasis, a residential complex developed by the Evergrande Group, in Luoyang, China, September 16, 2021.

Carlos Garcia Rawlins | Reuters

The first test of Evergrande’s debt crisis comes this week – investors will be watching whether or not the competitive Chinese property developer is able to pay its due interest on a bond or not.

According to data from S&P Global Ratings, the company is due to pay interest of $ 83 million on Thursday.

Evergrande’s 5-year US dollar bond had an initial issue volume of around US $ 2 billion, according to market data provider Refinitiv Eikon – although the price has now plummeted.

According to Refinitiv Eikon, the yields on this bond rose from just over 10% at the beginning of the year to 560%. The bond is expected to mature in March 2022.

Another interest payment on a 7-year US dollar bond is due next Wednesday.

“What happens on Thursday promises to be a game-changing event for the markets in one way or another, perhaps bigger than the FOMC result that occurred just hours earlier,” Ray Attrill told CNBC, referring to the sessions the US Federal Reserve, which are being closely watched by investors.

Analysts and market watchers largely assume Evergrande will miss the interest payment on Thursday. However, it is technically not in default unless it does not make this payment within 30 days.

S&P Global Ratings said Monday that default was “likely”.

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“The fact is, Evergrande is already in technical arrears because bank interest has not been paid,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. He was referring to reports that the Chinese government had told major banks that the real estate giant would not be able to pay interest on its loans due earlier this week on Monday.

“Given the risk of missing out on a bond coupon later this week, the ability to scare the capital markets remains substantial; considering Evergrande accounts for ~ 11% of all Asian high-yield bonds,” Varathan wrote in a note Tuesday.

Foreign investors, offshore bonds can be taken first

When it comes to these initial defaults, institutional and other overseas investors are likely to be more affected than domestic investors in China, analysts said.

It is possible that onshore bonds denominated in yuan will take precedence over offshore bonds denominated in dollars. Offshore bonds are mostly held by institutional or foreign investors, while domestic private investors in China are more likely to own onshore bonds.

“Obviously, the looks of bond investors who get paid when retail wealth management product owners and home buyers are far from clarity, let alone resolution, are not good,” Varathan told CNBC in an email.

It is therefore “strong to treat the obligations to private investors of wealth management products in view of the social stability issues,” he said.

Protests from angry homebuyers and investors have broken out in some cities over the past week, and social unrest is a key concern.

Last week, around 100 investors showed up at the Evergrande headquarters in Shenzhen, demanding repayment of loans for overdue financial products – chaotic scenes formed, according to Reuters.

The priority for domestic investors will therefore impact the risk of default of dollar-denominated offshore bonds – most of which are held by institutional or other overseas investors – versus onshore bonds, which are mostly held by domestic investors.

“An additional point of interest, however, is whether the coupon due on offshore bonds is treated less favorably than the coupons on onshore bonds – especially given the asymmetrical arrangement where offshore defaults do not trigger cross-default (while onshore defaults Cross-default for offshore bonds). ) “, Varathan told CNBC. A cross-default occurs when a default triggered in one situation spills over to other bonds, which leads to wider contagion.

“In other words, will Evergrande choose to simply not stick with offshore bonds while complying with onshore commitments?” asked Varathan.

Which funds own Evergrande bonds?

UBS, HSBC and Blackrock have amassed Evergrande bonds in the past few months, according to Morningstar Direct data.

“We saw some funds invested in China Evergrande between July and August 2021 as spreads and attractive valuations widened,” said Patrick Ge, manager research analyst at Morningstar.

Here are the top funds with the highest exposure to Evergrande bonds, according to Morningstar.

  • Fidelity Asian High Yield Fund
  • UBS (Lux) BS Asian High Yield (USD)
  • HSBC Global Investment Funds – Asia High Yield Bond XC
  • Pimco GIS Asia High Yield Bond Fund
  • Blackrock BGF Asian High Yield Bond Fund
  • Allianz Dynamic Asian High Yield Bond

– CNBC’s Brittany Dawe contributed to this report.