China Evergrande braces for debt deadline after doubting ability to pay

An exterior view of China Evergrande Centre in Hong Kong March 26, 2018. — Reuters pic
An exterior view of China Evergrande Centre in Hong Kong March 26, 2018. — Reuters pic

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HONG KONG, Dec 6 — After lurching from deadline to deadline, China Evergrande Group is again on the brink of default, with its pessimistic comments condemning its stock to a record low just as direct state involvement raises hope of a managed debt restructuring.

Having made three 11th-hour coupon payments in the past two months, Evergrande again faces the end of a 30-day grace period today, with dues totalling US$82.5 million (RM348 million).

But a statement on Friday saying creditors had demanded US$260 million and that it could not guarantee funds for coupon repayment prompted authorities to summon its chairman — and wiped a fifth off its stock’s value today.

Evergrande, once China’s top-selling developer, is grappling with over US$300 billion in liabilities, meaning a disorderly collapse could ripple through the property sector and beyond.

Its Friday statement was followed by one from authorities in its home province of Guangdong, saying they would send a team at Evergrande’s request to oversee risk management, strengthen internal control and maintain operations — the state’s first public move to intervene directly to manage any fallout.

The central bank, banking and insurance regulator and securities regulator also released statements, saying risk to the property sector could be contained.

Analysts said authorities’ concerted effort signalled Evergrande has likely already entered a managed debt-asset restructuring process.

Morgan Stanley said such a process would involve coordination between authorities to maintain operations of property projects, and negotiation with onshore creditors to ensure financing for project completion.

Regulators would also likely facilitate debt restructuring discussion with offshore creditors after operations stabilise, the US investment bank said in a report.

After the flurry of statements, Evergrande’s stock nose-dived 20 per cent today to close at an all-time low of HK$1.82.

Its November 2022 bond — one of two bonds that could go into default upon today non-payment — was trading at the distressed price of 18.560 US cents on the dollar, compared with 20.083 cents at Friday close.

Liquidity squeeze

Evergrande has been struggling to raise capital through asset disposal, and the government has asked Chairman Hui Ka Yan to use his wealth to repay company debt.

The firm is just one of a number of developers starved of liquidity due to regulatory curbs on borrowing, prompting offshore debt defaults, credit-rating downgrades and sell-offs in developers’ shares and bonds.

To stem turmoil, regulators since October have urged banks to relax lending for developers’ normal financing needs and allowed more real estate firms to sell domestic bonds.

To free up funds, Premier Li Keqiang on Friday said China will cut the bank reserve requirement ratio “in a timely way”.

Still, the government may have to significantly step up policy-easing measures in the spring to prevent a sharp downturn in the property sector as repayment pressure intensifies, Japanese investment bank Nomura said in a report yesterday.

Quarterly dollar bond repayments will almost double to US$19.8 billion in the first quarter and US$18.5 billion in the second.

Yet easing measures such as the ability to sell domestic bonds are unlikely to help Evergrande refinance as there would be no demand for its notes, CGS-CIMB Securities said today.

Evergrande’s inability to sell projects — with almost zero November sales — also makes short-term debt payments “highly unlikely”, the brokerage said.

Contagion

Today, smaller developer Sunshine 100 China Holdings Ltd said it had defaulted on a US$170 million dollar bond due December 5 “owing to liquidity issues arising from the adverse impact of a number of factors including the macroeconomic environment and the real estate industry”.

The delinquency will trigger cross-default provisions under certain other debt instruments, it said.

Last week, Kaisa Group Holdings Ltd — China’s largest offshore debtor among developers after Evergrande — said bondholders had rejected an offer to exchange its 6.5 per cent offshore bonds due December 7, leaving it at risk of default.

The developer has begun talks with some of the bondholders to extend the deadline for the US$400 million debt repayment, sources have told Reuters.

Smaller rival China Aoyuan Property Group Ltd last week also said creditors have demanded repayment of US$651.2 million due to a slew of credit-rating downgrades, and that it may be unable to pay due to a lack of liquidity.

Aoyuan Chairman Guo Zi Wen on Friday told executives at an internal meeting to have a “wartime mindset” to ensure operation and project delivery and to fund repayment, a person with direct knowledge of the matter told Reuters.

Such tasks will be priorities for the developer, which will leave bond repayment negotiation to professional institutions in Hong Kong, said the person, declining to be identified as the matter is private.

Aoyuan did not respond to a request for comment.

The developer’s share price fell nearly 8 per cent on Monday. Kaisa lost 3.8 per cent whereas Sunshine 100 plunged 14 per cent. — Reuters

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