Monday, January 24

Evergrande Moves Toward Restructuring As Debt Terms Approach

The long-awaited debt restructuring of China’s Evergrande Group may finally be at hand, representing a new test for the Xi Jinping government as it tries to control the country’s financial excesses without derailing economic growth.

The embattled developer said in an exchange filing late Friday that it plans to “actively engage” with offshore creditors in a restructuring plan, offering its most explicit acknowledgment yet that its $ 300 billion of local liabilities and in abroad have become unsustainable.

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A barrage of statements from Chinese regulators, several of which came minutes after Evergrande’s announcement, suggested authorities are struggling to contain the fallout on homeowners, the financial system, and the broader economy rather than orchestrating a rescue.

The government of Guangdong, the southern province where Evergrande is based, summoned founder Hui Ka Yan to express concern over the company’s announcement and said it would send a team to the developer to ensure “normal” operations. The People’s Bank of China blamed the company’s “own mismanagement” and “reckless expansion” for Evergrande’s troubles.

The flurry of activity follows several weeks of relative calm for Evergrande, which has been making last-minute payments on its dollar bills since late October at the behest of Beijing. Statements on Friday indicate that the world’s most indebted developer could struggle to make more payments within its grace periods, even after a series of personal asset sales by Hui that appeared designed to help Evergrande meet compliance. your short-term debt obligations.

Evergrande shares tumbled as much as 12% to HK $ 1.98 in early trading on Monday, the lowest level since May 2010. Its dollar bonds fell as much as five cents on the dollar, according to credit traders. The real estate service provider and the new energy vehicle startup in which the developer has the largest stakes fell as much as 7% and 13%, respectively.

The company’s next test comes later on Monday. That’s when a 30-day grace period ends with two dollar bond interest payments initially due on November 6: a coupon of $ 41.9 million for a promissory note due in 2022 and $ 40.6 million of interest on a security due the following year. Both bonds were issued by the Scenery Journey Ltd. unit.

The question for global markets is whether Beijing can coordinate a restructuring without changing the overall real estate sector, which accounts for nearly a quarter of economic output. Policymakers have a history of abandoning efforts to hold back developers when risks to growth mount, although Xi appears more determined than his predecessors to end the moral hazard that allowed companies like Evergrande to expand so quickly.

One risk is that Beijing does not have a complete picture of how indebted Evergrande and its peers have become. The Shenzhen-based developer indicated in its exchange filing on Friday that it may not be able to meet its commitment to guarantee payment on a $ 260 million bill issued by the Jumbo Fortune Enterprises joint venture, an obligation that many investors Evergrande didn’t even know it existed. until a few months ago.

While it will be important to monitor how Evergrande’s restructuring progresses, the odds of a resumption of panic in Chinese credit markets are low, according to analysts at China International Capital Corp., one of the country’s largest investment banks. Real estate companies with poor management and high financial risks will be “eliminated,” but authorities are likely to ensure that higher-quality developers retain access to finance, CICC analysts Yan Xu and Eric Yu Zhang wrote in a report.

China is likely to ease restrictions on real estate this month and in the first quarter of 2022, according to analysts at Jefferies Financial Group Inc.Regulators said on Friday they would expand mortgage support beyond first-time home buyers. , guide banks in providing loans to developers for acquisitions and other open funding channels, including the asset-backed equity market, the analysts wrote. A reduction in reserve requirements for banks is likely to come in the coming weeks after Prime Minister Li Keqiang said on Friday that a cut would come at the “right time,” the analysts wrote.

Bond investors have been anticipating an Evergrande restructuring for months, with the company’s 2025 dollar bills trading below 30 cents since late September. Chinese high-yield dollar bonds rose as much as 1 cent on the dollar on Monday, as expectations that the central bank could lower the reserve ratio required for lenders outweigh concerns about possible Evergrande debt restructuring, according to credit operators.

Investors are increasingly differentiating between the weakest and the strongest borrowers after the Chinese government took steps to mitigate the cash crisis for higher-rated developers in recent weeks. Aside from Evergrande, money managers are preparing for a possible default by Kaisa Group Holdings Ltd., which faces a $ 400 million bond maturity on Tuesday after failing to exchange the notes for new ones that mature 18 months later. . Smaller Chinese developer Sunshine 100 China Holdings Ltd. defaulted on $ 179 million in debt and interest payments due Sunday.

For Evergrande, the next step may be to enter an informal debt suspension as it continues to try to negotiate with creditors, according to Bloomberg Intelligence analyst Daniel Fan.

“An extension of maturities, based on debt sustainability, would be likely,” he said. “One option to sweeten the process is to tie part of the reimbursement to its assets abroad,” such as its Hong Kong-listed EV unit, Fan added.

Evergrande Dollar Bonds Coupon expiration date Grace period ends Amount

(A million dollars)

TIANHL 13% due in 2022 November 6th 6th of December 41.93
TIANHL 13.75% due in 2023 November 6th 6th of December 40.56
EVERRE 7.5% due in 2023 December 28th January 27th 50.43
EVERRE 8.75% maturing in 2025 December 28th January 27th 204.77

Evergrande’s offshore creditors are expected to rank near the bottom of the priority list in a restructuring, behind nearly 1.6 million homeowners who gave the developer upfront payments on properties, local vendors, Evergrande employees and individual investors who They purchased related trust and wealth management products. to the company. Several WMPs and trusts linked to Evergrande have already defaulted, restructured or have been late in payments.

© 2021 Bloomberg

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