Evergrande opts not to declare special dividend in surprise move

Hong Kong

CHINA Evergrande Group surprisingly decided against declaring a special dividend after investors were spooked by news that banks and ratings companies are growing wary of the debt-laden developer.

The board chose to cancel the proposal less than two weeks after flagging it to investors. It took into consideration the current market environment, the rights of shareholders and creditors, and the long-term development of businesses, according to a statement to the Hong Kong stock exchange on Tuesday.

Led by chairman Hui Ka Yan, the world's most indebted developer has been trying to convince bond and stock holders that it has ample ammunition to make good on its borrowings, while also countering short-sellers. Its credit rating was cut by S&P Global Ratings late Monday, the third downgrade by a global firm in about a month.

The decision to forgo the shareholder reward confounded analysts who had reckoned Evergrande may take one of three routes: a cash payment, a stock dividend or handing out shares in its higher-value listed subsidiaries.

"It's clearly negative for equity holders," said Eddie Chia, a portfolio manager at China Life Franklin. "However, saying and not doing something might spook some bond investors, even though it's relatively neutral given there is no asset or dividend leakage."

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Shares of Evergrande fell as much as 12 per cent on Tuesday morning in Hong Kong, trading at HK$5.95 (S$1.04) as of 12.09 pm. The stock has dropped 60 per cent this year.

Its bond due 2025 fell 2.8 cents on the dollar to 48.9 cents on Tuesday, on pace for a record low, Bloomberg-compiled data show.

Evergrande said on July 15 that its board would discuss the special dividend, after the stock slumped 48 per cent from a January high. The announcement briefly triggered a spike in the shares that was erased as investor doubts over the troubled developer continued.

No matter what the original dividend plan was meant to be, a cancellation is positive from the perspective of creditors, given it keeps assets within Evergrande, said Fiona Yang, a credit analyst at JPMorgan Chase & Co. "Evergrande's tight liquidity is known to everyone, it is not a good time to show muscle by giving out dividend."

Markets were spooked last week by a loan dispute the developer had with Guangfa Bank, which led to the freezing of a US$20 million deposit held by Evergrande's main onshore subsidiary.

The incident, which was later resolved, pointed to "the fragility of the company's funding situation," S&P said, lowering the credit rating by two notches. S&P also cited margin erosion as the developer resorts to aggressive price promotions to accelerate sales.

The sell-off deepened after a Chinese city halted its sales at two residential projects and alleged Evergrande didn't properly use funds, before a quick resolution the next day.

On top of that, at least four of Hong Kong's largest lenders stopped providing mortgages to buyers of Evergrande's unfinished apartments in the city. At least two of them are reconsidering the halts after their decisions were questioned by the Hong Kong Monetary Authority, Bloomberg reported. BLOOMBERG