Hong Kong

HIGHLY-LEVERAGED property firm China Evergrande Group is in talks with financial institutions to raise about US$1.5 billion this month by offering its Hong Kong office tower as collateral, two sources with direct knowledge of the matter said.

The fund-raising plan underscores the pressure the developer is under, as China's property sector slows and Beijing's capital controls have restricted its ability to pay offshore debt, which stood at US$16.4 billion as at the end of June.

Evergrande bought the office tower in Wan Chai, a bustling business district by day and red-light district by night on Hong Kong island, for HK$12.5 billion (S$2.2 billion) in 2015 from Chinese Estates Holdings.

Evergrande, which has yet to fully settle the transaction, plans to use the capital raised from refinancing the tower partly to pay back offshore debt and make dividend payments, one of the sources said.

While the practice of raising money by offering property as collateral is not uncommon among highly leveraged Chinese developers, it is unusual to securitise a building that has yet to be fully paid off, a property market expert said.

Evergrande had agreed to pay off the tower in instalments to Chinese Estates within six years of the sale.

"Evergrande is trying to ... extract additional liquidity," said one of the sources, who has direct knowledge of the fund-raising plan.

Helped by record profit and a boom in China's property market, Evergrande cut its net gearing ratio to 127 per cent at end-June from 184 per cent at the end of 2017, while total borrowings dropped as much as 8 per cent during the period.

The developer aims to further cut the ratio to about 70 per cent by June 2020 by repaying high-interest debts and curbing land purchases.

But there are rising concerns over the property sector's ability to deleverage, with developers expecting a slowdown after two years of government measures aimed at cooling the red-hot sector.

Shares of Evergrande, which has a market value of US$31 billion, have plunged 26 per cent so far this year, lagging a roughly 14 per cent fall in the benchmark Hang Seng Index. REUTERS