China Evergrande falls short of promised restructuring plan
CHINA Evergrande Group, the world’s most indebted developer at the centre of a broader debt crisis in the country’s property industry, had for months vowed to deliver a “preliminary restructuring plan” by the end of July.
But when the beleaguered property giant made an exchange filing in Hong Kong late on the night of the final business day of the month, it presented instead what it called “preliminary restructuring principles”.
While the builder said that it would try to announce a specific restructuring plan within 2022, it made no reference to the previously promised preliminary proposal, which investors had hoped would provide clarity on plans to sell assets and extend debt maturities.
Evergrande’s failure to deliver on its preliminary plan could fuel concern about the future of a firm whose fate has broader implications for China’s US$50 trillion financial system and millions of homeowners. Other builders have added to record defaults since last year after a government crackdown on excessive leverage and speculation on housing. Liquidity crunches have prompted developers to stall projects and leave fees unpaid. Unprecedented mortgage and loan boycotts have erupted from angry homebuyers and suppliers.
The sheer size of Evergrande’s liabilities of about US$300 billion has left global investors worried that any collapse could spark financial contagion and curb growth in the world’s second-largest economy, which depends on the housing market for about a quarter of gross domestic product.
“The whole pyramid is collapsing now,” said Anne Stevenson-Yang, co-founder of J Capital Research. “What’s different is that things are worse now because of the Evergrande crisis a year ago, which is spreading its tentacles throughout the Chinese economy.”
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Newly appointed chief executive officer Shawn Siu said that Evergrande will focus on completing construction projects, and won’t sacrifice the interest of onshore investors, according to an interview with 21st Century Business Herald. When asked why the restructuring plan fell short of market expectations, Siu said that the company encountered complicated and challenging matters, asking for more patience.
Evergrande’s potential failure to follow its previously set timeline would be “negative for overall investor confidence, and sets the process on the wrong foot as it would dent Evergrande’s credibility further”, Jean-Louis Nakamura, the chief investment officer for the Asia-Pacific region at Lombard Odier, told Bloomberg News last week.
The development comes just days after a management shakeup stirred fresh uncertainties. The group had said that former CEO Xia Haijun was forced to resign amid a company probe into how 13.4 billion yuan (S$2.74 billion) of deposits were used as security for third parties to obtain bank loans, which some borrowers then failed to pay back. Chief financial officer Pan Darong was also made to step down.
“The delay is not exactly a surprise to the market given that there was the negative development at Evergrande recently about the resignation of the CEO and the CFO,” said Zerlina Zeng, senior credit analyst from CreditSights.
The company itself said as recently as June that it was actively pushing forward with restructuring work and expected to announce the preliminary plan by the end of July.
The builder shook markets when it defaulted on dollar-bond payments late last year. It is also facing a winding-up lawsuit and resistance from creditors that could push it toward its first onshore default.
Evergrande said in the Friday (Jul 29) filing that it may offer some assets outside of China to repay creditors, including shares of its electric vehicle and property management services. The restructuring will include the company’s offshore notes, debt obligations of its subsidiaries, and repurchase obligations by its unlisted online sales platform FCB Group, it said.
The builder said “the principle of fair treatment of creditors will be reflected in the restructuring proposal”.
President Xi Jinping’s government is trying to strike a balance between curbing debt at acquisitive and leveraged private companies, while limiting the economic fallout. Xi is seeking to rein in ballooning borrowings and the billionaire class as part of his “common prosperity” campaign to reduce a yawning wealth gap. That’s led to a record wave of dollar bond defaults by developers.
In one example of how this is all cascading, a group of small businesses and suppliers that said they’d stop paying their own debts blamed Evergrande for leaving them out of pocket.
China is considering a plan to seize undeveloped land from distressed real estate companies, using it to help finance the completion of stalled housing projects that have sparked mortgage boycotts across the country, according to people familiar with the matter.
The proposal, which is still under discussion and could change, would take advantage of Chinese laws allowing local governments to wrest back control of land sold to real estate companies if it remains undeveloped after 2 years, without compensation. That would give authorities more leeway to direct funds toward uncompleted homes, potentially to the detriment of creditors who would lose claims on some of the developers’ most valuable assets.
While officials would have bandwidth to adjust the process to suit local conditions, a typical scenario would involve seizing land from a distressed developer and giving it to a healthier rival, which would in turn provide funding to complete the distressed developer’s stalled projects, the people said. The government could also rezone the seized land in some cases to increase its value, the people added, asking not to be named discussing private information.
The proposal is one of several measures under consideration as Xi’s government tries to prevent turmoil in the housing market from fuelling social unrest and derailing the broader economy. The focus on completing projects is the latest sign that policymakers are prioritising homeowners over bondholders, who have been burned by a record number of defaults by real estate giants including China Evergrande. The Ministry of Housing and Urban-Rural Development is discussing the proposal with other regulators and it’s unclear whether it will get a green light from senior Chinese leaders. The housing ministry and the ministry of natural resources didn’t immediately respond to faxed requests for comment. China’s top 100 developers owned land parcels valued at 42.5 trillion yuan at the end of last year, according to China Real Estate Information. Many of them borrowed heavily to buy the land, in hopes that prices would continue rising. BLOOMBERG
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