In its property management business, China’s Evergrande real estate firm will sell a majority stake for more than $5 billion, a deal which would be the largest asset sale yet at the debt-laden property developer if it goes ahead, Chinese media said on October 4, 2021.
Evergrande, once China’s top-selling property group, is facing what could be one of the country’s largest-ever restructurings as the company is weighed down by debts of around $305 billion. Uncertainty over Evergrande’s fate has unsettled financial markets worried about any fallout from its troubles.
Pending an announcement about a major transaction, Evergrande (3333.HK) on October 4 said it requested a suspension in the trading of its shares in Hong Kong. A spin-off listed last year, Evergrande Property Services Group (6666.HK), also requested a stop to trade and said it referred to “a possible general offer for shares of the company.”
Citing unspecified other media reports, China’s state-backed Global Times said Hopson Development (0754.HK) was the buyer of a 51% stake in the property business for more than HK$40 billion ($5.1 billion).
Both Hopson and Evergrande failed to respond to requests for comment on the Global Times report.
The possible deal indicates that the company is still working to meet its obligations, analysts said. But the possible liquidation of Evergrande at low prices rekindled broader concerns about the risk to China’s property sector and economy. OCBC analyst Ezien Hoo said:
“Selling an asset means they are still trying to raise cash to pay the bills. Looks like the property management unit is the easiest to dispose of in the grand scheme of things.”
With Evergrande due to finding just over $500 million in coupon payments by the end of the year and facing a $2 billion bond maturity in March, the reported proceeds from the sale of $5 billion, in theory, would be enough to pay short-term offshore creditors.
According to the Services’ Group’s December 2021 listing valuation, the price also represents a roughly 17.5% discount.
Having a market value of HK$60.4 billion ($7.8 billion), Hopson’s shares have jumped 40% so far this year and it was rated B+ by Fitch in June.
Based on its financial statements, Evergrande’s property services business, which says it managed a total contracted floor area of 810 million square meters at the end of June 2021, was also profitable in the first half of 2021.
Evergrande has sparked concerns that its troubles could spread through the global financial system as liabilities equal to 2% of China’s gross domestic product.
After China’s central bank vowed to protect homebuyers’ interests, nervousness eased. But, the ramifications for China’s economy have kept investors on edge – particularly as signs of distress have begun spreading to Evergrande’s peers.
On October 4, property developer Fantasia Holdings’ (1777.HK) credit rating was cut by four notches by credit rating agency Fitch.
The suspension of Monday’s share trading knocked the offshore yuan, which fell by about 0.3% against the dollar and weighed on the Hang Seng benchmark index (.HSI).
The possible deal activity lifted shares in Evergrande’s electric vehicle unit (0708.HK) by 29%, but cast a spell over regional stocks and global markets (.MIAPJ0000PUS). Gary Ng, a senior economist at the Asia Pacific at Natixis said:
“It is a positive move towards solving Evergrande’s liquidity crisis and we expect more to come. However, having said that, offloading some assets may not be totally sufficient, the key for Evergrande is to get project construction going and to sell inventory.”
So far this year, Evergrande’s shares have plunged while its bonds have held steady at distressed levels.
The group had negotiated a settlement with some domestic bondholders last month and made a repayment on some wealth management products, largely held by Chinese retail investors.
Bondholders have said that interest payments due in the past few weeks have failed to arrive while holders of the company’s $20 billion in offshore debt appear further back in the creditor queue.
In October, Evergrande will be facing deadlines on dollar bond coupon payments totaling $162.38 million.
($1 = 7.7868 Hong Kong dollars).