One of China’s largest-ever debt restructurings is starting to take shape. China Evergrande Group was declared to be in default in late 2021, the highest-profile casualty of a broader crisis in the country’s property industry. The government is now overseeing the rescue, quelling fears of a disorderly collapse that could jolt the world economy. But Evergrande bondholders are still wondering how much of their money they’ll see after the dust settles. And the company remains under pressure to deliver thousands of pre-sold housing projects — and pay its workers — to avoid sparking social unrest.

1. How did we get here? 

Evergrande was founded in 1996 and relied on heavy borrowing to fuel its growth, becoming the largest dollar-debt borrower among its peers and for a time the country’s biggest developer by contracted sales. It says it owns more than 1,300 projects in 280 cities. It had a liquidity scare in 2020, and outlined a plan to roughly halve its $100 billion debt pile by mid-2023. But China’s housing market began to slow as regulators cracked down on excessive borrowing. Further funding problems sent the company’s stock and bonds tumbling and, after late payments on some dollar bonds, it missed a December 2021 deadline to pay two dollar-bond coupons.  

2. Do bondholders have any bargaining power?

Some offshore noteholders saw little use in pressing their case in Chinese courts given the government’s heavy involvement in the overhaul. (A risk-management committee dominated by state officials is guiding the restructuring.) A group of overseas investors criticized the company’s lack of engagement at the beginning of their talks. However, bondholders secured more influence in June 2022 when a creditor filed a lawsuit to wind-up Evergrande in Hong Kong. The court pressed the company to show concrete proof of progress in the debt negotiations in order to avoid liquidations, and the firm promised to win major creditors’ support for a debt plan by late February or early March.

3. How bad are Evergrande’s finances?

Its property sales fell for the first time in at least a decade last year, plummeting 39% as sales were frozen for months before resuming in April 2022. It had about 1.97 trillion yuan ($283 billion) in liabilities as of June 2021, the most among its peers in China. Almost half of that amount was bills to suppliers and other payables, while interest-bearing debt totaled 572 billion yuan. The company has reduced its net debt-to-equity ratio to below 100%, meeting one of the government’s “three red lines” — metrics imposed to limit borrowing by real estate companies. Evergrande had $19.2 billion in offshore dollar bonds outstanding, the most among Chinese developers. Another risk is the firm’s guarantees on related-party debts, including private-placement bonds with limited disclosure.

4. Is it making any progress?

By early December, after months of delays, Evergrande appeared to be closing in on a debt restructuring plan and was aiming to present a proposal for overhauling its dollar debt by the end of the month. Evergrande has said it may offer some assets outside of China to repay creditors, including shares in its electric vehicle and property management services businesses. Some of them have asked Chairman Hui Ka Yan to inject at least $2 billion of his personal wealth into the company as a condition for agreeing to any company proposal. Evergrande said the restructuring would include its offshore notes, debt obligations of its subsidiaries, and repurchase obligations by its unlisted online sales platform FCB Group. Meanwhile, activity on Evergrande’s construction sites appeared to be returning to normal. The company said in September it had resumed construction on 668 of a total 706 projects, and would restart work on the remaining 38 by the end of that month.

5. Could the government still bail out Evergrande? 

The prospect was long seen as unlikely and faded further when People’s Bank of China Governor Yi Gang said the company would be dealt with in a market-oriented way. A full bailout could tacitly condone the type of reckless borrowing that landed one-time high-flyers like Anbang Group Holdings Co. and HNA Group Co. in trouble as well. On the other hand, allowing a behemoth like Evergrande to collapse would cause pain for many other companies as well as would-be homeowners. The company has been told by Chinese regulators to prioritize payments to migrant workers and suppliers. 

6. What about the rest of China’s property sector?

Combined contracted sales at the top 100 developers were down 43% in the first 11 months of 2022. China set up a financial stability fund as part of continuing efforts to reduce systemic risks. It raised 64.6 billion yuan ($9.6 billion) in a first round of fundraising. After a congress in October where President Xi Jinping secured a third term as leader, the government was said to have issued sweeping directives to rescue the property sector, with some 16 measures that range from addressing the liquidity crisis among developers to loosening down-payment requirements for homebuyers. Developers will be allowed to access more money from home presales, the industry’s biggest source of funds. Chinese authorities are said to be mulling a further softening of their stance on property policies in a key economic meeting in December.

When Xi marked the centenary in 2021 of the Communist Party’s founding with a speech proclaiming his nation’s unstoppable rise, there overlooking the festivities in Tiananmen Square was Evergrande founder Hui Ka Yan. Born into poverty as the son of a wood cutter, Hui has been a party member for more than three decades and has invested in areas endorsed by the top leadership, such as EVs and traditional Chinese medicine. He’s been a prominent philanthropist — though his net worth has taken a beating — and Evergrande’s purchase of local soccer team Guangzhou F.C. indicates he shared Xi’s passion for the sport. In the end, those political ties were not enough to avert a default. Hui was said to have requested personal leave from the Chinese People’s Political Consultative Conference in 2022 as Evergrande worked to defuse operational risks. 

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