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Evergrande's race for cash could avert nightmare scenarios
CREDIT investors are once again contemplating nightmare scenarios for China Evergrande Group. But the world's most indebted real estate company has a series of funding options that could help it avoid a market-destabilising cash crunch.
Asset sales, stock listings and a boost in holiday condo sales are among ways that the property developer can restore investor confidence after its stock and several bonds plunged last week.
Evergrande units could raise as much as US$9.3 billion from stock sales alone, according to estimates from Glenn Ko at HSBC Holdings plc.
The developer doesn't have a lot of time. Strategic investors have the right to demand repayments for the US$19 billion they poured into the company three years ago unless Evergrande is able to win a listing in China by Jan 31.
The timing for a decision isn't clear, but some analysts doubt Evergrande will get approval as policymakers restrict funding options for developers to cool speculation.
Without the Shenzhen listing, here are some of the alternatives for Evergrande to raise money or reduce costs to pare its $120 billion debt load:
Hong Kong IPO
Evergrande is planning to tap the soaring demand for property management companies by spinning off its services business via a listing on the Hong Kong stock exchange. The Shenzhen-based developer won approval last week for the sale, which could raise US$1 billion to US$2 billion. HSBC said the initial public offering could raise as much as 30 billion yuan (S$6.03 billion) by year-end.
Hong Kong sale
If the China listing fails, Evergrande could look to a secondary stock sale in Hong Kong, where it already trades. Any additional sales in Hong Kong wouldn't be subject to the mainland securities regulators, according to Bloomberg Intelligence (BI) analysts Kristy Hung and Patrick Wong.
Evergrande is counting on a surge in real estate sales to raise additional cash for its debt obligations and possibly repay the strategic investors. The firm has raised 452 billion yuan in cash from property sales this year to Sept 24, an increase of 51 per cent from a year earlier, according to HSBC. More condo sales are expected from the "golden week" holidays, which start on Oct 1.
Beijing is looking to tighten access to funding across China's highly indebted property sector. The widely circulated "three red lines" policy restricting bank borrowing for real estate firms may impact some lower-rated issuers, according to S&P.
Evergrande has probably crossed the "red lines", meaning selling new bonds will be difficult if the policy is implemented, though they could continue to refinance existing debt, HSBC said. The developer will have to repay about US$5.8 billion of bonds and loans over the next two months, raising the prospect of sharply higher refinancing costs if investors baulk.
Tap bank assets
Banks and trust firms, with almost 600 billion yuan of outstanding debt, have turned more cautious on Evergrande, threatening to cut off its biggest source of funding. Several banks have decided not to allow the developer to draw on unused credit lines, while some trust firms called Evergrande last week to gauge the prospect of repaying the investors on time, sources said. Evergrande has several financial assets it could sell to ease the immediate crunch.
Billionaire Hui Ka Yan, who controls Evergrande, has other asset levers to pull if he chooses. The developer could also look to sell a portion of its massive land holdings. Mr Hui has aspirations to take on Elon Musk in the electric vehicle business, through China Evergrande New Energy Vehicle Group Ltd. The auto unit plans to list shares in Shanghai, a transaction that CGS-CIMB analysts said could reduce net gearing by 30 percentage points. The stock sale could raise 34 billion yuan, according to HSBC estimates.
While one of the strategic investors has indicated it won't extend the deadline for repayment beyond January, it's not clear if the other investors will be as rigid. BLOOMBERG