Giant real estate developer China Evergrande Group continues to fight for its life, bobbing above the waves to gasp a breath of air here on Friday thanks to a last-minute payment it made on a bond coupon.
It wired the US$83.5 million interest payment into a trustee account at Citibank on Thursday, according to multiple reports. That means the bondholders should receive the money before a deadline on Saturday.
The bond coupon was due on Sept. 23. Saturday would be the expiration date for a 30-day grace period, meaning Evergrande would have hit a hard default without the payment. That particular bond's value rose 1.9% to 26.5 cents on the dollar, still default-level pricing.
The respite drove the share prices of Chinese developers higher on Friday. The Hang Seng Properties sub-index was up 1.4% in late trading.
Evergrande's shares (HK:3333 and EGRNY) resumed trading in Hong Kong on Thursday following a three-week suspension, only to fall 12.5% on the day. The shares rose 4.3% here on Friday. Now essentially a penny stock, Evergrande is down 81% in 2021.
Although Chinese officials say the Evergrande situation won't cause a systemic problem in the financial system, it has raised doubts in the minds of Chinese property buyers, hurting the economy's largest private-sector industry. Homeowners often purchase apartments off-plan, putting down a deposit on a property that is yet to be built. They're hesitant to do so now. New-home prices stalled in September, while local governments are calling off land sales due to a lack of interest from underfunded developers.
Others feel pressure, too
Other mainland homebuilders are also struggling to get under China's "three red lines" restricting their debt levels. Fantasia Holdings Group (HK:1777) failed to repay US$206 million in principal on U.S dollar senior notes that came due on Oct. 4, while Sinic Holdings Group (HK:2103) failed on Monday to make interest and principal payments on a US$250 million offshore note.
Modern Land (HK:1107) asked for a suspension of its shares on Thursday. It had been negotiating with creditors on a plan for US$250 million in principal due on notes that mature on Oct. 25. But Modern Land has now scrapped those talks, saying they're not in the interest of either the company or the note holders, and it is looking for financial advisers to plan an overhaul of its capital structure.
Evergrande is still flailing around and threatening to drown in its US$305 billion debt burden. Asset sales totaling US$2 billion have fallen through that would have given the company desperately needed cash.
It missed another US$47.5 million payment to international bond holders three days after the first missed interest installment. We'll see if it arranges other last-minute financing. The episode has killed faith in the offshore U.S. dollar-denominated debt market for Chinese property developers in general; those high-interest holdings had been an easy way for large institutions to goose returns.
Facing a mountain of debt
Evergrande's main problem is a cash flow crunch that makes it very difficult to service its C¥571.7 billion (US$89 billion) in interest-bearing debt, with around C¥240 billion (US$37.6 billion) of it due inside a year. It owes US$19.2 billion on its offshore dollar bonds.
Any bond default could cause cross-default in Evergrande's other holdings. It would also stall Evergrande's efforts to sell off assets because companies in default normally must receive approval from creditors if they want to sell assets.
Chinese officials warned last month that Evergrande was likely to miss its loan obligations. After its main operating company in mainland China said it had on Sept. 22 "resolved" a bond payment to domestic Chinese investors, it looked like the company might make good on its debts inside China while leaving international investors high and dry. Today's news suggests it will do its level best to meet at least its minimum obligations to international creditors.
The current activity shows the company is desperate to avoid a hard default of any kind. If Evergrande does collapse into bankruptcy or administration, it is likely to be stripped for parts and disbanded, with state-owned developers picking up the pieces. When China has been forced to bail out companies in the past, top executives have gone to jail for fraud.
Stiff prices to pay
For instance, when China's insurance regulator seized Anbang Insurance, the buyer of the Waldorf Astoria hotel, in February 2018, former chairman Wu Xiaohui was sentenced to 18 years in prison for fraud and embezzlement.
The former chairman of distressed-debt manager China Huarong Asset Management, Lai Xiaomin, who was also a Communist Party official, was executed this January after he was convicted of bribery, corruption and bigamy.
As I explained late last month, the emergence from bankruptcy of the HNA Group, once one of China's most acquisition-minded companies overseas, was coupled with the arrest of its chairman, Cheng Feng, and CEO, Adam Tan, on allegations of unspecified criminal offenses.
Consequently, Evergrande founder and chairman Hui Ka-yan has an excellent incentive to keep the company afloat. But Evergrande's efforts to raise more than piecemeal packets of cash so far have failed. Hui, still worth US$11.6 billion according to Forbes, has dipped into his own pocket to make sure a property development gets completed so that its developer, Jumbo Fortune Enterprises, can work something out on a US$260 million bond that is guaranteed by Evergrande.
A developer spat
Rival China-focused developer Hopson Development Holdings (HK:0754) and Evergrande are pointing the finger of blame at each other after the collapse of a deal for Hopson to buy a majority stake in the property-management spinoff Evergrande Property Services (HK:6666).
Hopson confirmed it had struck a deal on Oct. 1 to buy 50.1% of Evergrande Property Services via a subsidiary for HK$20.0 billion (US$2.6 billion). That would have been equivalent to HK$3.70 per share.
The completion was supposed to occur by Oct. 12. When that didn't happen, Hopson said it filed a purchaser's notice demanding that Evergrande perform its obligations under the deal. Evergrande then sent a rescission statement to terminate the agreement.
Hopson said it is still prepared to go through with the deal. At issue are the details of how the payment was supposed to occur.
Hopson says it was supposed to pay the money into the bank account of Evergrande Property Services, allowing the subsidiary to settle its accounts payable and receivable with its parent company, after which the parent was due to get the rest of the proceeds. But Hopson said parent Evergrande Group tried to change the terms of the deal, requesting that the money be sent to the parent instead. Hopson rejected that request, saying it would not be able to ensure the target subsidiary that it was buying could get the amounts payable owed to it from the parent.
Evergrande Property Services is solvent to the tune of net assets of C¥11.9 billion (US$1.9 billion) as of its mid-year earnings, with profits of C¥2.6 billion (US$414 million) in 2020.
Evergrande has a different version of events. It says it had "reason to believe" that Hopson hadn't met the prerequisites to complete the deal "based on information from various sources" that didn't include Hong Kong's stock watchdog, the Securities and Futures Commission. Rumors, in other words. So the company says it exercised its right to rescind the deal on those grounds.
I know which explanation sounds more plausible. There's a lot of obfuscation about Evergrande's story, while Hopson is highly specific that the Evergrande parent wanted to pocket the money due to the Evergrande child. Chinese tycoons often treat public companies like their own plaything and muddle the distinction between subsidiaries, cross-holdings and parent companies.
Hopson shares were suspended from Hong Kong trading on Oct. 4 but resumed on Thursday. They have risen 10.4% as of Friday afternoon.
Evergrande Property Services was also suspended for the same period. Since resuming on Thursday, they have fallen 6.4%, although at HK$4.79 they are still well above the HK$3.70 price that Hopson was willing to pay.
Deals prove hard to come by
Evergrande's only dealmaking success is to sell a 19.9% stake in the regional Shengjing Bank back to the bank for C¥10.0 billion (US$1.6 billion). Evergrande, which previously held 34.5% of the Shenyang-based bank, will see its holding cut to 14.6% of its stock.
Another developer, state-owned Yuexiu Property (HK:0123), has reportedly pulled out of a US$1.7 billion deal to buy its main office in Hong Kong, with the Yuexiu board concerned that the company's unresolved debt obligations may disrupt any sale.
Evergrande Group admits there has been "no material progress" on the sale of its assets. It promises to keep trying to ease its liquidity issues and negotiate for a rollover or extension on its debts. But it says there is no guarantee it can meet its financial obligations.
The Financial Reporting Council, Hong Kong's auditing regulator for listed companies, says it has launched an inquiry into the adequacy of Evergrande's reporting. It is particularly concerned about past accounting affirmations in its 2020 full-year and half-year 2021 accounts through June that it is a going concern. The regulator has received a complaint about the adequacy of Evergrande's 2020 accounts, and is also investigating its auditor, PricewaterhouseCoopers.
The regulator notes that Evergrande reported cash as of the end of 2020 of C¥159 billion (US$24.9 billion) that didn't cover its current liabilities of C¥1.5 trillion (US$235.9 billion). But PwC signed off without comment on its accounts, and neither the company nor the auditor reflected any uncertainty about its solidity as a going concern. All of a sudden in mid-2021, the company started declaring its negotiations with suppliers and construction workers on projects that had been suspended due to months-overdue payments and doubt as to its survival as a going concern if it couldn't improve its liquidity.
You'd get long odds on a bet that Evergrande will survive its crisis. Once China's largest developer by sales and led by a man who was once the richest person in Asia, it has fallen on its hardest of times. But for now, it continues to fight.
