The troubled Chinese real estate developer is expected to miss interest payments this week on a first U.S. dollar bond, although European bank exposures appear manageable.

Evergrande, China's second largest real estate developer, is widely expected to miss interest payments this week and next for two U.S. dollar bonds maturing in 2022 and 2024 respectively, signaling a possible subsequent default on the debt, a report by Reuters indicates.

The developer's share price was down 14 percent at 2.17 HK dollars on Monday, with the yield on the 2022 bond at an eye-watering 500%.

Many commentators and analysts have called this a potential watershed moment for foreign investors in China's debt market should the government not step in to bail them out.

Potential Spillover

AllianceBernstein C0-Head of Fixed Income Jenny Zeng told CNBC on Friday that this could trigger a "domino effect" given the off-shore dollar market has other Chinese developers who "can't survive much longer" if they are no longer able to refinance their debt, warning that the spillover could have a far-reaching impact to the Chinese economy.

The South China Morning Post reported that effective yields on Chinese junk-rated bonds has risen sharply to 15.8 percent, up from 10.5 percent in June, indicating that other developers such as Guangzhou R&F Properties and Sichuan Langang are likely feeling the impact. 

European Bank Exposures

An article by Bloomberg published Saturday indicated that among two European banks, UBS and HSBC, were among the top owners of Evergrande's dollar bonds, with UBS holding $275.7 million and HSBC $206.9 million. Although significant, these numbers pale in comparison to the losses sustained by Credit Suisse earlier this year related to the Archegos and Greensill debacle. UBS itself sustained a $774 million loss from the Archegos collapse.

Chinese Bank Provisions 

Agricultural Bank of China – the nation’s third largest lender by assets – has made some loan loss provisions for Evergrande-related exposure, according to a «Reuters» report citing unnamed sources.

Separately, China Minsheng Banking Corp and China CITIC Bank Corp are prepared to roll over some of Evergrande’s near-term debt obligations. 

Reduced Bank Exposure

According to the report, Chinese bank exposure to Evergrande has decreased in the past year, such as a 10 billion yuan ($1.55 billion) reduction of Evergrande loan exposure to 30 billion yuan at Minsheng.

There is a possibility that the government may intervene to manage an orderly collapse of Evergande, the report said, adding that regulators have completed related risk assessments.

In a leaked 2020 document, Evergrande was believed to have liabilities with over 128 banks and 121 non-banking institutions. Although the document was written off as a fabrication by Evergrande, it is reportedly viewed with credibility amongst analysts.