Evergrande unit discovers US$2.1b of its cash can be seized by banks

[BEIJING] China Evergrande Group's property-services unit is investigating how US$2.1 billion of its deposits were used as security for pledge guarantees and seized by banks.

The unusual development, which Evergrande Property Services Group said it discovered while preparing its annual report, may heighten scrutiny of corporate governance at the real estate empire founded by billionaire Hui Ka Yan.

While Evergrande's main property business has been in financial distress for months, the services unit has long been considered among the stronger parts of Hui's group. Evergrande and its Hong Kong-listed units also warned of delays in the release of audited financial results.

"It was found that deposits of approximately 13.4 billion yuan (S$2.86 billion) as security for third-party pledge guarantees had been enforced by the relevant banks," Evergrande Property Services said in a statement to the Hong Kong stock exchange, without providing details on the pledge, the third party or the lenders.

"The company will establish an independent investigation committee and arrange for experts to be appointed to investigate the pledge guarantees."

In a separate statement, Evergrande said it considers the matter to be a "major incident" and will assess the implications for the company. Shares of Evergrande and its units have been suspended in Hong Kong since Monday.

The financial statements of Chinese property companies are coming under increased scrutiny as they prepare their first annual reports in the wake of credit-market turmoil that triggered a record wave of defaults. "The announcement suggests Evergrande Property Services had offered a third-party guarantee to banks which had lent money to another borrower," said Travis Lundy, a special situations analyst who publishes on Smartkarma.

The earnings delay may fuel volatility in Evergrande's bonds, according to Bloomberg Intelligence analyst Adrian Sim. An 8.75 per cent Evergrande note due in 2025 was little changed at about 12.2 cents on Tuesday afternoon, according to Bloomberg-compiled prices.

Sim said that the 13.4 billion yuan in deposits enforced by banks is almost equivalent to the property-services unit's entire cash holdings as of June 30, 2021. Such a reduction in cash would cut Evergrande's consolidated cash balance, which totalled 86 billion yuan then, he said.

Evergrande and its financial advisers will hold an investor call Tuesday at 9 pm Hong Kong time, according to two investors who received the invitation and asked not to be identified discussing private information. The firm didn't immediately have a comment when reached by Bloomberg.

Bondholders are closely watching Evergrande, the world's most indebted developer with more than US$300 billion in liabilities, after it defaulted on dollar-bond payments in December.

The firm's debt restructuring is expected to be among China's largest and most complex. The builder told creditors in January it aimed to issue a preliminary restructuring plan in the subsequent six months.

Evergrande tried to sell a 50.1 per cent stake in its property services unit to Guangdong-based Hopson Development Holdings Ltd. for HK$20 billion (S$3.46 billion) when its credit crunch intensified last year, only for the talks to be scrapped in October.

Long considered a cash cow for the group, Evergrande Property Services now has a market value of HK$24.9 billion, more than the parent company's HK$21.8 billion. The two companies along with Evergrande's electric-vehicle unit expect to miss the March 31 deadline for reporting earnings because audit work hasn't been completed.

Evergrande cited "drastic changes" in the operating environment adding to audit procedures, along with disruptions from Covid-19.

Other beleaguered developers Sunac China Holdings and Shimao Group Holdings also flagged potential delays in releasing audited 2021 results. BLOOMBERG