Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

China Evergrande Group:   Trick Without Treat

Evergrande Update - Limited Contagion, and Positive Regulatory Noises Near-Term

Evergrande as a Study of Quantum Mechanics Theory

Evergrande's Room for Manoeuvre - A Question of Confidence

Quiddity Advisors

Event-Driven

In <a href="https://www.smartkarma.com/insights/evergrande-as-a-study-of-quantum-mechanics-theory" target="_blank" data-smartkarma-citation="insights:55979" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a> in August I discussed how the state of <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a>'s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/237/678/original/catinabox3.jpeg?1635296450" class="editor-image img-responsive" data-smartkarma-image-id="237678"></figure>With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.</section><h3>Evergrande Property Services Deal Broken - The Nuance</h3>Last week it became clear that <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> ("Evergrande") would end up NOT selling a controlling stake in <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> ("EPS") to <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> ("Hopson"), but that was less clear that it appeared. Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1020/2021102000957.pdf" target="_blank" rel="noopener">said</a> Hopson had not fulfilled its obligations (with word being - getting the Guangzhou govt stamp of approval). Hopson's "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1020/2021102000969.pdf" target="_blank" rel="noopener">clarification</a>" on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the "Cash and Short-Term Securities" at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. There is a HK$1bn break fee to the 'party which defaults' on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service - which are a crucial part of the value of the potential "estate" of Evergrande for the bondholders - may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. <h3>Coupons Paid and Unpaid - The Nuance</h3>The News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently - roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. But there is nuance here too. And timing. And that is better discussed in more detail below. <h3>The Discovery Phase of the Bezzle</h3>I used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith's fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up - The Bezzle - was now in its discovery phase, where "Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous."  I can cherry pick quotes, and if I do, I'd note that section continues a bit, then says, "Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed."I'd say we are definitely there now.It's a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve - which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.<div class="content-highlight">What matters now is that there is pressure on those who profited from The Bezzle to unwind the gains to whence they came.</div>What struck many observers for many years was how impervious to the enormous risks born by Evergrande's capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin <a href="https://www.caixinglobal.com/2021-08-30/rich-friends-who-helped-evergrande-tycoon-count-their-losses-101763855.html" target="_blank" rel="noopener">article</a> at the end of August which talked quite explicitly about Hui Ka Yan's poker buddies supporting him and his investments (the next day, one of his poker buddies - Joseph Lau and his wife, now head of <a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" data-smartkarma-citation="entities:20954:1" rel="noopener">Chinese Estates Holdings (127 HK)</a>, started selling shares), and <a href="https://www.caixinglobal.com/2021-09-22/caixin-explains-how-evergrandes-hui-ka-yan-blew-up-a-43-billion-fortune-101776376.html" target="_blank" rel="noopener">another article</a> perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  Hui Ka Yan - also known by Xu Jiayin - has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). A Reuters <a href="https://www.reuters.com/world/china/china-evergrande-shares-set-slide-105-after-26-bln-deal-collapses-2021-10-21/" target="_blank" rel="noopener">article</a> last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. <h2>The Newest News</h2>On Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to "optimise their foreign debt structures and proactively prepare for repayment of both principal and interest" <a href="https://www.reuters.com/article/china-evergrande-debt-ndrc/chinese-regulators-meet-companies-over-foreign-debt-holdings-idUSB9N2R702G" target="_blank" rel="noopener">according to Reuters</a>. On 26 October, Modern Land <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1026/2021102600163.pdf" target="_blank" rel="noopener">defaulted</a> on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1011/2021101100057.pdf" target="_blank" data-v-6b4d63ed="" rel="noopener">together offered to loan the company 800 million yuan</a> "within the next 2-3 months" on 11 October and a surprise given the NDRC meeting.And Bloomberg <a href="https://www.bloomberg.com/news/articles/2021-10-26/developer-s-payment-miss-signals-more-stress-evergrande-update" target="_blank" rel="noopener">reported</a> yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande's debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that "common prosperity" means rich people make sure those from whom they take money to become rich get what they are owed. There is nuance here too. And timing. More discussion of timing and nuance below the fold.

In Evergrande as a Study of Quantum Mechanics Theory in August I discussed how the state of Evergrande (3333 HK)'s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.Evergrande Property Services Deal Broken - The NuanceLast week it became clear that Evergrande (3333 HK) ("Evergrande") would end up NOT selling a controlling stake in Evergrande Property Services (6666 HK) ("EPS") to Hopson Development (754 HK) ("Hopson"), but that was less clear that it appeared. Evergrande said Hopson had not fulfilled its obligations (with word being - getting the Guangzhou govt stamp of approval). Hopson's "clarification" on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the "Cash and Short-Term Securities" at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. There is a HK$1bn break fee to the 'party which defaults' on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service - which are a crucial part of the value of the potential "estate" of Evergrande for the bondholders - may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. Coupons Paid and Unpaid - The NuanceThe News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently - roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. But there is nuance here too. And timing. And that is better discussed in more detail below. The Discovery Phase of the BezzleI used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith's fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up - The Bezzle - was now in its discovery phase, where "Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous."  I can cherry pick quotes, and if I do, I'd note that section continues a bit, then says, "Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed."I'd say we are definitely there now.It's a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve - which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.What matters now is that there is pressure on those who profited from The Bezzle to unwind the gains to whence they came.What struck many observers for many years was how impervious to the enormous risks born by Evergrande's capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin article at the end of August which talked quite explicitly about Hui Ka Yan's poker buddies supporting him and his investments (the next day, one of his poker buddies - Joseph Lau and his wife, now head of Chinese Estates Holdings (127 HK), started selling shares), and another article perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  Hui Ka Yan - also known by Xu Jiayin - has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). A Reuters article last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. The Newest NewsOn Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to "optimise their foreign debt structures and proactively prepare for repayment of both principal and interest" according to Reuters. On 26 October, Modern Land defaulted on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng together offered to loan the company 800 million yuan "within the next 2-3 months" on 11 October and a surprise given the NDRC meeting.And Bloomberg reported yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande's debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that "common prosperity" means rich people make sure those from whom they take money to become rich get what they are owed. There is nuance here too. And timing. More discussion of timing and nuance below the fold. 

Evergrande Bezzle Discovered - Quantum Kitty's Regenerative Capabilities Have Nuance and Timing