Wednesday, January 19

China Evergrande Ends Hopson Deal Negotiations, Calls to Resume Trade

China Evergrande Group canceled talks to divest a stake in its property management division and said real estate sales plummeted about 97% during the peak home buying season, worsening its liquidity crisis on the eve of a dollar bond deadline that could lead the company to default.

Speaking to the Hong Kong Stock Exchange late Wednesday, Evergrande added that it had made no further progress in selling assets and may not be able to meet its financial obligations. Its shares tumbled as much as 14% on Thursday after resuming trading after a three-week hiatus.

The deal fell through even after government officials in Evergrande’s hometown Guangdong province helped negotiate the talks, a person with knowledge of the matter said. It occurs days before the end of the grace period for a dollar bond coupon that the company did not pay in September. Evergrande’s 8.25% note due March 2022 was indicated at 23.8 cents on the dollar, data compiled by Bloomberg shows.

The real estate giant’s liquidity crisis has become one of the biggest risks to the Chinese economy, eroding confidence in a real estate sector that, by some estimates, accounts for nearly a quarter of gross domestic product. The Evergrande crisis is also fueling concerns about financial contagion, with at least two other developers defaulting on dollar bonds this month and Chinese junk bond yields hovering at the highest level in a decade.

Evergrande, controlled by billionaire Hui Ka Yan, said it ended talks last week to sell 50.1% of its shares in Evergrande Property Services Group Ltd. for about HK $ 20 billion (HK $ 2.6 billion). Dollars).

Hui Ka Yan

The potential acquirer, Hopson Development Holdings Ltd., said in its own statement that it “regrets to announce that the supplier has not completed the sale” of the Evergrande Property Services stake, and requested that its shares also resume trading.

Guangdong officials offered to arrange bank loans for Hopson to finance the purchase of the stake, said a person with knowledge of the matter, who asked not to be identified when discussing private information. The companies were unable to reach an agreement in part due to opposition from some independent directors and creditors of Evergrande Property Services, the person said.

The three companies and the Guangdong government did not immediately respond to requests for comment.

The trading of the companies had been suspended since the beginning of the month pending the announcement of a major transaction. Evergrande Property Services fell as much as 10% on Thursday. Hopson was up 6.6%.

Meanwhile, shares by Chinese developers rallied in Shanghai and Hong Kong after government officials, including Vice Premier Liu He, said risks in the property market are controllable.

Evergrande said its contracted property sales from September to October 20 totaled 3.65 billion yuan ($ 571 million), a small fraction of the 142 billion yuan it posted from September 1 to October 8 of the year. last.

Falling sales and the scrap-unit deal increase pressure on Hui to find alternative ways to raise cash. Bondholders, banks and other creditors are increasingly concerned about being repaid by the world’s most indebted developer, which has more than $ 300 billion in liabilities. The 30-day grace period for a bond interest payment of $ 83.5 million expires this weekend. Creditors could try to require the company to repay the debt immediately, which can trigger cross-defaults on other Evergrande debts.

Separately, Evergrande secured a deal for an extension of more than three months on a $ 260 million bond issued by Jumbo Fortune Enterprises and guaranteed by the developer, according to a report from credit research provider REDD.

Premium asset

Financial regulators have encouraged Evergrande to take all possible steps to avoid a short-term default on the dollar bonds, while concentrating on completing the properties and repaying individual investors. The company has also fallen behind in payments to banks, suppliers and holders of land investment products. Selling prized assets, even at a discount, was seen as critical to the strategy of finding cash.

The sale of the management unit could have brought “short-term relief” to Evergrande’s liquidity crisis, Bloomberg Intelligence analyst Lisa Zhou wrote in a note before the talks ended. It could also have bought time for the developer to fix its overseas financing problems, said BI credit analyst Daniel Fan.

The real estate services business, which went public in Hong Kong last year, has been a useful source of income for the cash-strapped parent. It reported an annual net income of 2.65 billion yuan, compared with 10.5 billion yuan for Evergrande. The unit has fallen less than its parent in Hong Kong operations this year, falling 43% before the stop, compared to Evergrande’s 80% drop.

Hopson is a Guangdong-based real estate company controlled by the family of billionaire Chu Mang Yee. Listed on the Hong Kong Stock Exchange since 1998, the shares rose 38% this year before the delisting.

The end of the talks comes as small Chinese real estate company Sinic Holdings Group Co. failed to repay interest and principal on its $ 250 million promissory note due Monday, and follows a surprise default earlier this month by part of Fantasia Holdings Group Co. Modern Land (China) Co suspended trading in Hong Kong on Thursday after canceling its request to extend the maturity of a dollar bond by three months.

A government crackdown on real estate companies threatens to create more defaults, adding to the broader risks facing China’s economy. Home prices plunged in September for the first time in six years. Economic growth slowed last quarter as the construction and property industries contracted for the first time since the start of the pandemic.

So far, the authorities are largely resisting the temptation to relax the industry. While there are “individual problems” in the housing market, the risks are generally controllable, Vice Premier Liu said on Wednesday. Market movements are a “stress reaction” to some defaults, and financing of the real estate sector is becoming normal, said deputy governor of the People’s Bank of China, Pan Gongsheng.

© 2021 Bloomberg

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