A growing crisis in China could have a big impact in the market for commercial paper.
Stablecoin issuer Tether says that it doesn’t hold any commercial paper issued by the Chinese real estate giant Evergrande. This comes amid concerns that Evergrande’s struggles might impact the commercial paper market.
“Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so,” said a spokesperson for Tether. “As we have indicated in our published statements and in our most recent assurance attestation with a reporting date of June 30, 2021, the vast majority of the commercial paper held by Tether is in A-2 and above rated issuers.”
Tether is the issuer of the largest stablecoin in the crypto markets, USDT, which has a market cap of $68 billion. Backing the stablecoin is a variety of assets, mostly held in commercial paper and certificates of deposits along with treasury bills. (Other assets include loans, bonds, cash and cryptocurrencies).
Commercial paper and certificates of deposit make up nearly half of Tether’s assets, some $30.8 billion on June 30, 2021 — the date specified in its most recent assurance report. According to a report from the FT that came after its first breakdown in May, the sheer size of these holdings puts the firm in the same league as investment firms Vanguard and BlackRock.
Tether has provided little information on where this commercial paper is based. When asked by The Block if it held any Chinese commercial paper, the company said that it holds international commercial paper but would not disclose any futher details. It did, however, tell the FT that it has limits on regional exposure.
A growing crisis in China
In China, there are serious concerns about Evergrande, which has run up a $300 billion debt and is struggling to pay interest. If the company were to collapse, it would have a huge impact on the financial system.
Evergrande has been trying to find ways to get out of its growing debt pile. The firm raised $8 billion by August, according to Bloomberg, but it wasn’t enough. On September 8, Fitch Ratings said that the company “appears probable” to default on its debt. Chinese authorities have since told banks that Evergrande won’t pay interest on its loans next week, per Bloomberg.
“This $300bn debt monster is potentially China’s Lehmann Brothers, trading in subterranean junk debt to Chinese (and global) counterparties (which may include Bitcoin via Tether) at spreads that imply insolvency,” said Nucleus Wealth chief strategist David Llewellyn-Smith in a recent article.
Evergrande is the biggest issuer of commercial paper in the Chinese real estate market, according to Reuters. At the end of 2020, it had $32 billion worth of commercial paper. The outlet estimated that the actual figure could be even higher, since it has other units, which also issue commercial paper.
“There is the stark reality that [a possible collapse] will have a huge impact on the commercial paper markets. Regardless of what commercial paper you hold, bonds and commercial paper would take a hit and some issuers may even fold,” tweeted Adam Cochran, partner at Cinneamhain Ventures.
As a result, even though Tether says it doesn’t hold commercial paper issued by Evergrande, an upheaval in the commercial paper market could still have wider ramifications.