China targets Evergrande risks with 10b yuan bank deal

Hong Kong

CHINA stepped in to buy a stake in a struggling regional bank from China Evergrande Group as it seeks to limit contagion in the financial sector from the embattled property developer.

Evergrande agreed to sell a 20 per cent stake in Shengjing Bank to the local Shenyang government for 10 billion yuan (S$2.09 billion), with the bank demanding that all proceeds go to settle debts with the lender, according to a statement to the Hong Kong stock exchange. In that case, the sale would do little to help Evergrande pay its massive debts to bond holders and homebuyers.

The sale illustrates how authorities are taking steps to minimise fallout to the banking system from the worsening liquidity crisis at Evergrande as they try to avoid a bailout.

At least 10 banks told investors earlier this month that they have sufficient collateral for loans to the developer and that risks are under control. Hong Kong's central bank asked lenders to report their exposure to Evergrande Group, according to people familiar with the matter.

"Maintaining social and financial sector stability is still the overarching policy objective of the Chinese government," said Nicholas Zhu, a senior analyst at Moody's Investors Service. "Authorities, including local governments, will take policy measures and assume coordination roles to ensure that the resolution of Evergrande does not cause social or financial instability."

In a sign of investor nervousness toward the banking industry, Dongguan Rural Commercial Bank plunged on its debut in Hong Kong. The lender listed its exposure to the real estate sector as a risk factor in a preliminary prospectus, saying the industry accounted for 8.8 per cent of its commercial loans as of March 31.

Evergrande will sell about 1.75 billion non-publicly traded domestic shares in Shengjing Bank to Shenyang Shengjing Finance Investment Group at 5.7 yuan apiece, according to the statement. The developer's stake in the lender will drop to 14.57 per cent after the latest transaction, which requires relevant approvals. Evergrande raised about one billion yuan from a previous stake sale of Shengjing Bank in August.

The transaction underscores the mounting pressure on billionaire Hui Ka Yan to spin off and sell assets to pay down a mountain of debt. Evergrande's original 36 per cent stake in Shengjing Bank was among its most valuable financial assets, worth about US$2.8 billion. That holding became less appealing as regulators toughened oversight on dealings such as preferential lending and bond purchases between banks and their largest shareholders.

Evergrande shares climbed 15 per cent in Hong Kong, paring their year-to-date decline to about 80 per cent. Its dollar bond due 2022 fell 1.3 cents on the dollar to 24.9 cents, set for a fresh record closing low, according to Bloomberg-compiled prices.

Shengjing Bank rose 1.4 per cent. The bank posted a more-than 60 per cent drop in first-half profit due to a decline in net interest income and higher impairment losses on assets. "The company's liquidity issue has adversely affected Shengjing Bank in a material way," Evergrande said in the statement, adding that the introduction of the purchaser will help to stabilise the bank's operations.

A report in May from Caixin Media's WeNews said the China Banking and Insurance Regulatory Commission was examining more than 100 billion yuan of transactions between the two. Evergrande boosted its stake in Shengjing Bank in 2019, following a request from authorities who wanted to recapitalise the lender, Bloomberg reported last year.

Evergrande is facing mounting pressure to repay its debts. The firm has already fallen behind on its payments to banks, suppliers and holders of onshore investment products. It's made no public statements on an US$83.5 million coupon that was due on Sept 23 and at least several holders had said they hadn't received the funds.

Fitch Ratings downgraded the developer's credit rating to C from CC on Wednesday, saying Evergrande likely missed interest payment on senior unsecured notes and entered a 30-day grace period.

The developer needs to pay a US$45.2 million coupon on Wednesday for a dollar bond that matures 2024, Bloomberg-compiled data show.

"With so many upcoming coupon payments towards year-end, selling non-core assets is the most efficient way for Evergrande to raise funds," said Steven Leung, executive director of UOB Kay Hian. The central government is "watching very closely" on the proceeds from asset sales, he added. BLOOMBERG