Evergrande moves toward restructuring as debt deadlines loom

[BEIJING] China Evergrande Group's long-awaited debt restructuring may finally be at hand, posing a fresh test for Xi Jinping's government as it tries to rein in the country's financial excesses without derailing economic growth.

The embattled developer had said in an exchange filing late on Friday that it plans to "actively engage" with offshore creditors on a restructuring plan, offering its most explicit acknowledgment yet that its US$300 billion of overseas and local liabilities have become unsustainable. The stock plunged as much as 20 per cent Monday to a record low.

A barrage of statements from Chinese regulators - several of which landed just minutes after Evergrande's announcement - suggested that the authorities are striving to contain the fallout on homeowners, the financial system and the broader economy rather than orchestrate a bailout.

The government of Guangdong, the southern province where Evergrande is based, summoned founder Hui Ka Yan to express concern over the company's announcement and said it would dispatch a team to the developer to ensure "normal" operations.

The People's Bank of China blamed Evergrande's problems on the company's "own poor management" and "reckless expansion". The flurry of activity follows several weeks of relative calm for Evergrande, which has been making last-minute payments on its dollar notes since late October at the urging of Beijing.

Friday's statements signal that the world's most indebted developer may struggle to make further payments within their grace periods, even after a spate of personal asset sales by Hui that appeared designed to help Evergrande meet its near-term debt obligations.

Evergrande shares plunged to HK$1.81 in afternoon trading on Monday, on track for a record low closing price. Its 8.25 per cent dollar bond due March 2022 is poised for its biggest fall on record, down 10.4 cents on the dollar to 23.2 cents in Hong Kong. The property services provider and new-energy vehicle start-up in which the developer holds the biggest stakes were down as much as 7 per cent and 13 per cent respectively.

The company's next test comes later Monday, when a 30-day grace period ends on two dollar bond interest payments that were initially due Nov 6: a US$41.9 million coupon for a note maturing in 2022, and US$40.6 million of interest on a security due the following year. Both bonds were issued by unit Scenery Journey Ltd.

The question for global markets is whether Beijing can coordinate a restructuring without upending the broader real estate sector, which accounts for nearly a quarter of economic output. Policy makers have a history of abandoning efforts to rein in developers when the risks to growth mount, though Xi appears more determined than his predecessors to stamp out the moral hazard that allowed companies like Evergrande to expand so rapidly.

One risk is that Beijing may not have a full picture of how indebted Evergrande and its peers have become. The Shenzhen-based developer indicated in its exchange filing on Friday that it may not be able to fulfill its pledge to guarantee payment on a US$260 million note issued by joint venture Jumbo Fortune Enterprises, an obligation that many Evergrande investors didn't even know existed until a few months ago.

While it will be important to monitor how Evergrande's restructuring progresses, the odds of renewed panic in Chinese credit markets are low, said analysts at China International Capital Corp, one of the nation's largest investment banks. Real estate companies with poor management and high financial risks will be "phased out", but the authorities are likely to ensure that higher-quality developers retain access to funding, CICC analysts Yan Xu and Eric Yu Zhang wrote in a report.

China is likely to ease restrictions on the real estate sector this month and into the first quarter of 2022, said analysts at Jefferies Financial Group Inc. Regulators on Friday signalled that they would expand mortgage support beyond first-time homebuyers, guide banks to provide loans to developers for acquisitions and further open funding channels, including the asset-backed securities market, the analysts wrote.

Bond investors have been anticipating an Evergrande restructuring for months, with the company's 2025 dollar notes trading below 30 cents since the end of September. Chinese high-yield dollar bonds rose by as much as 1 cent on the dollar Monday, as expectations the central bank may cut the required reserve ratio for lenders offset concerns about Evergrande's potential debt restructuring, said credit traders.

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