in think you are missing the $150bn in A/P, $30bn in contract liabilities and estimate on the undisclosed WMP and trust products from the debt stack here
Sure, but those unsecured liabilities should rank junior to the more senior-ranked bonds in a liquidation event. And in a government-led restructuring where liquidation value is scarce, credit ranking may not even matter. The policymakers' priorities will likely be to mitigate contagion from an Evergrande fallout to the rest of the economy, and saving Evergrande's debt-holders (at least the local ones) will likely be a higher priority.
In almost all liquidations payables rank senior to bonds, as they are structurally so at the opco, while bonds are at the holdco.
agreed on seniority potentially being upended here - but that will likely be to the offshore creditors detriment. One example is HNA: WMP and bonds were legally pari going in, but WMP recovered senior.
True, I guess I did overlook supplier and employee liabilities - maybe because in my head I was assuming that much of the Trade Payables were actually junior-ranking commercial bills that were extended to suppliers (as discussed in Part 1).
Also correct on the WMP seniority potentially changing. There's definitely room for potential holes in the thesis, and thanks for pointing it out. But I guess even a nominal 50% fixed income return isn't too bad? ;)
very much appreciate your content, think it is very thoughtful. I just wanted to point out some quirks on the debt side.
I think the danger here is that latest a/p and contract liabilites are RMB 1.2tn alone + .5tn of onshore debt = 1.7tn, which is already greater than the asset value in your waterfall. On top of this you have ??? WMP and ??? MI claims.
No you're definitely right, I did miss that out. The bulk of that RMB 1.2tn in A/P are Trade Payables, which I pointed out in Part 1 could actually be commercial bills extended to suppliers (as reported by Bloomberg): https://valueinvesting.substack.com/p/evergrande-part-1
That's why I assumed that the Trade Payables were actually junior-ranking commercial bills to the senior bonds. Unfortunately there is no disclosure in the AR that separates out the commercial bills from the "real" trade payables, as they're all lumped together under 'Trade Payables to third parties' - even in the notes.
And please let's not get into the WMP's or potentially undisclosed off-balance sheet cash advances to MI's... I'm trying to keep things simple here :laugh: But yeah you're definitely correct that these are all potential holes in my thesis.
in think you are missing the $150bn in A/P, $30bn in contract liabilities and estimate on the undisclosed WMP and trust products from the debt stack here
Sure, but those unsecured liabilities should rank junior to the more senior-ranked bonds in a liquidation event. And in a government-led restructuring where liquidation value is scarce, credit ranking may not even matter. The policymakers' priorities will likely be to mitigate contagion from an Evergrande fallout to the rest of the economy, and saving Evergrande's debt-holders (at least the local ones) will likely be a higher priority.
In almost all liquidations payables rank senior to bonds, as they are structurally so at the opco, while bonds are at the holdco.
agreed on seniority potentially being upended here - but that will likely be to the offshore creditors detriment. One example is HNA: WMP and bonds were legally pari going in, but WMP recovered senior.
True, I guess I did overlook supplier and employee liabilities - maybe because in my head I was assuming that much of the Trade Payables were actually junior-ranking commercial bills that were extended to suppliers (as discussed in Part 1).
Also correct on the WMP seniority potentially changing. There's definitely room for potential holes in the thesis, and thanks for pointing it out. But I guess even a nominal 50% fixed income return isn't too bad? ;)
very much appreciate your content, think it is very thoughtful. I just wanted to point out some quirks on the debt side.
I think the danger here is that latest a/p and contract liabilites are RMB 1.2tn alone + .5tn of onshore debt = 1.7tn, which is already greater than the asset value in your waterfall. On top of this you have ??? WMP and ??? MI claims.
Then you have the offshore bonds.....
No you're definitely right, I did miss that out. The bulk of that RMB 1.2tn in A/P are Trade Payables, which I pointed out in Part 1 could actually be commercial bills extended to suppliers (as reported by Bloomberg): https://valueinvesting.substack.com/p/evergrande-part-1
That's why I assumed that the Trade Payables were actually junior-ranking commercial bills to the senior bonds. Unfortunately there is no disclosure in the AR that separates out the commercial bills from the "real" trade payables, as they're all lumped together under 'Trade Payables to third parties' - even in the notes.
And please let's not get into the WMP's or potentially undisclosed off-balance sheet cash advances to MI's... I'm trying to keep things simple here :laugh: But yeah you're definitely correct that these are all potential holes in my thesis.