Evergrande deal misses target after it cuts out founder's rich friends

CHINA Evergrande Group broke with precedent this week by excluding friends of billionaire founder Hui Ka Yan from a closely watched share sale, a strategy that was designed to bolster investor confidence in the embattled developer but may have instead done the opposite.

Evergrande left Mr Hui's frequent associates out of the deal as it sought to raise as much as US$1.09 billion, according to people familiar with the matter. The company wanted to prove that it could access long-term funding without relying on other Chinese property tycoons, one of the people said.

While Evergrande did entice several big-name buyers including Norway's sovereign wealth fund, the share sale ended up raising about half the targeted amount and was priced at a steep discount to the previous close. Evergrande's stock slumped 17 per cent in Hong Kong trading on Wednesday and its offshore bonds fell by as much as 5 cents on the dollar, with some analysts interpreting the downsized offering as a sign of weak investor demand.

The negative market reaction adds pressure on the world's most indebted developer to raise more money in other ways, including business unit spin-offs and increased condominium sales in China. While the company isn't facing an immediate liquidity crisis, its US$120 billion mountain of debt remains a concern for investors and Chinese regulators.

"The share placement flop shows that Evergrande's extensive liabilities remain an overhang," said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong.

Evergrande said it couldn't immediately respond to a request for comment.

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Among the developer's near-term liabilities are about 10.6 billion yuan (S$2.1 billion) of domestic bonds maturing on Friday, Bloomberg-compiled data show. Evergrande raised 2.1 billion yuan after pricing a five-year note on Wednesday and previously sold a 4 billion yuan bond in September, just before reports of a potential credit crunch emerged. Evergrande secured relatively cheap borrowing costs at 5.8 per cent for both, the second-lowest coupon among its outstanding yuan bonds, the data show. It's unclear who bought the notes.

Mr Hui has counted on other tycoons to raise money in the past, tapping his financial ties with real estate empires run by three Chinese magnates. Known locally as the "Big Two Club" because of their fondness for a Chinese poker game of the same name, the group includes Chinese Estates Holdings' Joseph Lau, New World Development billionaire Henry Cheng and C C Land Holdings' Cheung Chung Kiu.

When Evergrande sold US$6 billion of bonds in January - just as parts of China's economy were preparing for a novel coronavirus lockdown - Mr Lau and his family bought US$1 billion, Hong Kong's Sing Tao Daily newspaper reported, without citing a source. The purchases were part of at least US$16 billion of transactions among Big Two Club members tracked by Bloomberg over the past decade, a tally that includes everything from stock investments to property contracts.

Evergrande's liquidity challenges surged to the fore last month after reports that the company sent a letter to the provincial government of Guangdong warning that payments coming due in January could cause a cash crunch and potentially lead to cross defaults in the broader financial sector. News of the plea for help sent Evergrande's stock and bonds tumbling even as the company dismissed the concerns as based on rumours and "fabricated" documents.

Evergrande sealed a deal on Sept 29 with a group of investors that waived their right to about US$13 billion of repayments in January, but there are still some holdouts. The company's largest strategic investor is leaning towards demanding repayment of US$3.4 billion, Bloomberg reported on Wednesday, citing people familiar with the matter.

Evergrande raised about HK$4.3 billion (S$753 million) from its top-up placement on Tuesday. The deal's nearly 15 per cent discount was wider than those offered by rival developers in placements this year: Sunac China Holdings sold US$1 billion of shares at a discount of 8.3 per cent, while China Vanke offered a discount of 4.8 per cent.

Evergrande still has multiple avenues to raise cash. It's sitting on one of the biggest portfolios of undeveloped land in China and has been cutting prices for new homes to ramp up sales.

The company is also planning to tap the soaring demand for property management companies by spinning off its services business via a listing on the Hong Kong stock exchange. The initial public offering could raise as much as 30 billion yuan by year end, according to analysts at HSBC Holdings Plc.

Mr Hui also has aspirations to take on Elon Musk in the electric vehicle business, through China Evergrande New Energy Vehicle Group. The vehicle unit plans to list shares in Shanghai. That stock sale could raise 34 billion yuan, according to HSBC. BLOOMBERG