Four people with knowledge of the matter said earlier this week that some offshore bondholders of China Evergrande Group (3333.HK) did not receive coupon payments by the end of a 30-day grace period, pushing the cash-strapped property developer closer to formal default.
The developer is at risk of becoming China’s biggest-ever defaulter if it fails to make $82.5 million in interest payments that were due last month. Such a scenario would trigger cross-default occurrences on the firm’s nearly $19 billion of international bonds.
What Is Evergrande?
In 1996, Chairman Hui Ka Yan launched Evergrande in Guangzhou. With $110 billion in sales last year, $355 billion in assets, and more than 1,300 developments nationwide, it is China’s second-largest property developer. It listed in Hong Kong in 2009.
Through a loan-supported land-buying spree and selling apartments quickly at low margins, Evergrande grew rapidly. Its interim report showed it employed 163,119 staff as of June 2021.
It has branched into businesses such as insurance, bottled water, soccer, and electric vehicles (EVs) due to slow growth.
How Did Concerns Arise Over Debt?
A leaked letter in September last year showed Evergrande pleading for government support to approve a now-dropped backdoor stock market listing. Sources told Reuters the letter was authentic; Evergrande called it fake.
In July, a court froze a $20 million bank deposit held by Evergrande at the bank’s request because in June it did not pay some commercial paper on time.
Due to missed payments to contractors and suppliers, the firm in late August said, construction at some of its developments had halted. It then sought payment extension for trust and bank loans in September.
Liabilities, including payables, totaled 1.97 trillion yuan ($306 billion) at the end of June 2021 – equivalent to 2% of China’s gross domestic product.
How Has Evergrande Reduced Debt?
After regulators introduced caps on three debt ratios, dubbed the “three red lines”, Evergrande accelerated efforts to cut debt last year. By the end of 2022, it is aiming to meet those requirements.
To spur sales, it offered steep discounts on residential developments and sold the bulk of its commercial properties. It has had a $555 million secondary share sale and raised $1.8 billion by listing its property management unit since the second half of 2021, while its EV unit sold a $3.4 billion stake.
Asset and equity disposal plans had failed to make any considerable progress, as explained by Evergrande in September. Since then, to raise capital, it has sold new shares in the company and stakes in units such as HengTen Networks Group Ltd (0136.HK).
What Is The Risk?
In 2018, China’s central bank said that companies including Evergrande might pose a systemic risk to the financial system.
The leaked letter showed that the company’s liabilities involved as many as 128 banks and over 121 non-banking institutions.
As many financial institutions are exposed via direct loans and indirect holdings through different financial instruments, late repayments could trigger cross-defaults.
What About Operations Outside Mainland China?
Evergrande owns an office tower and residential developments in Hong Kong, plus a vast undeveloped land parcel.
It has acquired a stake in automobile technology developers, including Sweden’s NEVS and the Netherlands’ e-Traction spending billions of dollars. It also has joint ventures with Germany’s Hofer and Sweden’s Koenigsegg.
What Do Regulators Say About Evergrande and Property?
Markets have been assured by authorities including Vice Premier Liu He, the central bank, and the securities regulator that risk to the property sector and economy were controllable, and that Evergrande’s problems were mainly due to its “own mismanagement” and “break-neck expansion”.
The People’s Bank of China (PBoC), in coordinated statements on December 3, said that the short-term risk caused by a single real estate firm would not undermine market fundraising in the medium or long term. Also, the housing sales, land purchases, and financing “have already returned to normal in China”.
What Happens Next For Evergrande?
Evergrande had established a risk-management committee including officials from state companies to assist in “mitigating and eliminating the future risks”.
This followed the provincial government of Guangdong saying that it would send a team to Evergrande at the developer’s request, which analysts said signaled that Evergrande would be starting to implement managed debt-asset restructuring.
What Will Debt Restructuring Look Like?
Coordination between authorities will be required in such a process to maintain operations of property projects, and negotiation with onshore creditors to ensure financing for project completion, as highlighted by Morgan Stanley.
After operations stabilize, regulators would also likely facilitate debt restructuring discussion with offshore creditors, as explained by Morgan Stanley.