Why Evergrande's investors cannot afford to force a default

New York

TO understand why some of China Evergrande Group's strategic investors agreed to throw the embattled developer a US$13 billion lifeline last month, look no further than their own sources of revenue.

Interior decorator Grandland Group Holdings' listed unit gets almost 58 per cent of its sales from Evergrande.

Hangzhou Robam Appliances's sales jumped after deepening its cooperation with Evergrande.

The developer has also been the largest source of revenue for door maker Beijing Jiayu over the last four years, showed company filings.

With such strong ties to the indebted real estate firm, many suppliers agreed to waive their rights to a combined US$13 billion repayment just five days after Evergrande became embroiled in a crisis of confidence.

The company warned in August it faced a potential default if it had to make the 130 billion yuan (S$26.3 billion) payment to these backers by a Jan 31 deadline, said people familiar with the matter.

Evergrande remains in talks with investors owed the remaining US$6 billion.

As part of the new deal, several strategic investors agreed to keep their shares and not require the company to buy them out, a filing showed.

The agreement turns their hybrid securities into common shares in Evergrande's property unit, said Raymond Cheng, a property analyst at CGS-CIMB Securities.

Company officials told investors in an Oct 16 call organised by Bank of America Corp that the new agreement does not include any put options.

Evergrande has not spelled out which of the investors were included in the group that agreed to waive the US$13 billion repayment.

The photo taken last month to announce the deal included executives from Grandland, Suning Appliance, Jiayu, Robam and Zhejiang Youpon Integrated Ceiling.

Among the holdouts is Evergrande Group's largest strategic investor, Shandong Hi-Speed Group, which is leaning towards demanding repayment of the US$3.4 billion it has sunk into the embattled developer, said people familiar with the matter.

Evergrande shares dropped 2.8 per cent to HK$14.58 in Hong Kong, a one-month low. The shares have slumped by a third this year. BLOOMBERG