China Evergrande Group (EGRN.F 27.67%) is in a bit of a bind. At last report, the Chinese property giant had missed the deadline for two separate interest payments to foreign bondholders -- who are starting to look like foreign bagholders, because Evergrande had no trouble finding the money to pay interest on a domestic debt.
And yet, Evergrande stock is looking quite healthy this afternoon, with its shares up 12.7% as of 1 p.m. EDT. Why is that?
As The Wall Street Journal reported this morning, Evergrande's property management business, Evergrande Property Services Group, has advised that it is preparing to report "inside information and a possible general offer for the shares of the company."
Evergrande Property Services currently boasts a $7.1 billion market capitalization, and investors today appear to be betting that if the subsidiary is sold, this will free up a big chunk of cash with which Evergrande can cure the defaults on the two interest payments it just missed, and provide cash to prevent any further missed payments -- for a while at least.
They may be right, but there are caveats. For one thing, Evergrande only owns 61% of the shares of Evergrande Property Services, so even if the subsidiary attracts a full-priced bid, it would only provide the parent company $4.3 billion, not the full $7.1 billion.
Still, $4.3 billion is a whole lot more than nothing. The question investors have to ask themselves now is, given the company's recent past practice, is Evergrande more likely to spend the cash paying back its foreign bond holders -- or will the Chinese government insist that Evergrande preserve its dwindling cash supplies for making domestic lenders whole, and preserving social stability in-country?
Personally, I worry that the latter scenario is more likely.