What’s next for debt-ridden China Evergrande?


One of the biggest ever debt restructurings in China is starting to take shape, with the Communist Party now in charge, after the China Evergrande Group was officially declared in default. The world’s most indebted developer, at the center of a wider debt crisis in the country’s property sector, has unveiled preliminary principles for restructuring its offshore debt. While state intervention has eased fears of a disorderly collapse that would rock the global economy, bondholders are wondering how much of their money they will see once the dust settles. Meanwhile, Evergrande is 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, founded in 1996, has grown through heavy borrowing. In 2010, it sold what was at the time the largest high-yield dollar bond among Chinese builders at $750 million. The company then embarked on an even bigger debt binge to fuel growth, becoming the biggest borrower of dollar debt among its peers and for a time the biggest developer in the country by contracted sales. It has more than 1,300 projects in 280 cities, according to the company’s website. Following a liquidity crunch in 2020, Evergrande outlined a plan to roughly halve its $100 billion indebtedness by mid-2023. But China’s housing market has started to slow amid regulatory restrictions. Another liquidity crunch sent the company’s stocks and bonds plummeting, and after making late payments on some dollar bonds, it missed a December deadline to pay two dollar bond coupons before the end. grace periods.

2. Could the government still bail out Evergrande?

The prospect was long considered unlikely and dimmed further when People’s Bank of China Governor Yi Gang said the company would be treated in a market-oriented manner. A full bailout would tacitly condone the kind of reckless borrowing that has also caused problems for figures like Anbang Group Holdings Co. and HNA Group Co.. Ending moral hazard – a tolerance in business for risky bets in the belief that the state will always bail you out – would also make the global financial system more resilient. On the other hand, allowing a giant like Evergrande to collapse would cause pain for many other companies as well as future owners. The company rushed to complete the projects and was told by Chinese regulators to prioritize payments to migrant workers and suppliers. More broadly, China set up a financial stability fund in 2022 as part of ongoing efforts to reduce systemic risks. It raised 64.6 billion yuan ($9.6 billion) in an initial fundraising.

3. What is the bargaining power of bondholders?

Not a lot. Evergrande said in late 2021 that its risk management committee would actively engage with creditors. Some offshore noteholders see little point in pursuing their case in Chinese courts given the heavy government involvement in the overhaul. This is a cross-border restructuring with debt-issuing units in multiple jurisdictions, which creates another challenge for bondholders trying to organize and show a united front. Still, some offshore creditors have consulted financial and legal advisers.

4. How bad are Evergrande’s finances?

CEO Xia Haijun was forced to resign on July 22 amid a company-led investigation into how 13.4 billion yuan in deposits were used as collateral by third parties to obtain bank loans, that some borrowers then failed to repay. Financial director Pan Darong was also forced to resign. Annual real estate sales in Evergrande fell for the first time in at least a decade last year, falling 39% from the 2020 level, as sales were frozen for months before resuming in April 2022. Between At the time, liabilities stood at some 1.97 trillion yuan as of June 30. 2021 – the most among its peers in China. Nearly half of that amount was made up of supplier bills and other debt, while interest-bearing debt was 572 billion yuan, down 20% from the end of 2020. The company had also reduced its net debt-to-equity ratio to less than 100%, reaching one of the government’s “three red lines” – parameters imposed to limit borrowing by property companies. Evergrande had $19.2 billion in offshore dollar bonds outstanding, the most among Chinese developers. Another risk is company guarantees on related party debts, including private placement bonds with limited disclosure.

5. Is it progressing?

Evergrande said on July 29 that it may offer certain assets outside of China to repay creditors, including shares of its electric vehicle and property management services, and added that it plans to announce a full restructuring plan this year, according to a filing. The restructuring will include Evergrandes’ offshore ratings, debts of its subsidiaries and redemption obligations through its unlisted online sales platform FCB Group. Evergrande said “the principle of fair treatment of creditors will be reflected in the restructuring proposal.” It also said it had partially or completely resumed construction on 96% of its pre-sold and undelivered projects, while the number of construction workers had returned to 86% of the group’s normal needs.

6. How are other developers doing?

The industry is in a deep slump. Combined contract sales of the top 100 developers were halved year-over-year in the first half of 2022. Home loan growth slowed to its weakest pace in more than two decades at the end of the month. march. Chinese junk dollar bond yields have been above 20% as defaults this year have already set an annual record. Many have had to seek extensions on onshore and offshore debt to avoid possible missed payments.

7. Is Evergrande well connected?

When President Xi Jinping marked the centenary of the founding of the Communist Party with a speech proclaiming his nation’s unstoppable rise, Evergrande founder Hui Ka Yan overlooked the festivities in Tiananmen Square. Born into poverty, the son of a logger, Hui has been a party member for 35 years and has invested in areas endorsed by top leaders, such as electric vehicles and traditional Chinese medicine. He is a prominent philanthropist, although his net worth has taken a hit, and Evergrande’s purchase of local football team Guangzhou FC indicates he shares Xi’s passion for sports. In the end, these political ties were not enough to avoid a default. Hui reportedly asked for personal leave at the Chinese People’s Political Consultative Conference in March as Evergrande worked to defuse operational risks.

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