China Evergrande

What Will Become Of Cash-Strapped China Evergrande? 2021

China Evergrande

China Evergrande’s billionaire owner Hui Ka Yan is likely to seek a restructuring of its total liabilities of $ 302 billion, as the property developer makes little progress toward averting a mounting debt crisis that has sparked protests outside its headquarters.

Hong Kong-listed Evergrande has hired Houlihan Lokey and Admiralty Harbor Capital to assess the company’s capital structure and its overall liquidity, the company announced today in a stock market filing.

Zhou Chuanyi, a credit analyst with Singapore-based Lucror Analytics, said that such measures tend to usher in a future debt restructuring, and investors are now closely monitoring interest payments for clues as to whether the process will begin soon.

The possibility of restructuring is high, he says. In Evergrande’s dollar bonds, there is already a discount for restructuring risks. Bloomberg data show that the 8.25% note due March 2022 fell 5.7 cents on the dollar to 26.8 cents around noon in Hong Kong. In the past year, the shares of the company have fallen 83% in value.

The Shenzhen-based company, which previously relied on cheap finance and pursued a debt-fueled path of expansion that led it to venture into football, electric cars, and spring water now appears to be running out of options to ward off creditors. Hundreds of Evergrande employees and investors protested at the company’s Shenzhen headquarters over late payments, according to Caixin, a local financial publication.

China Evergrande
Hui Ka Yan

Evergrande did not respond to a request for comment. Investors are warned in the presentation that the company faces “tremendous” cash flow pressure. He said homebuyer confidence has been dampened by negative media reports, which led to a “significant decline” in property sales in September. According to the document, Evergrande’s other fundraising efforts – selling equity stakes in its publicly traded electric vehicle and real estate services units – have not succeeded as expected.

“Given the difficulties, challenges, and uncertainty associated with improving the group’s liquidity, there is no assurance that the group will be able to meet its financial obligations under the financing documents and other relevant contracts,” Evergrande writes.

Lucor Analytics’ Zhou says a watershed moment could occur when Evergrande’s offshore bonds of $ 3.5 billion mature in March next year. In the absence of extra cash, the company is likely to default and then go through a lengthy debt restructuring process, he says.

In addition, Warut Promboon, managing partner of Hong Kong-based credit research firm Bondcritic, believes that debt restructuring will likely take place under the supervision of local governments. The government will step in because Evergrande is too big and the effects of a disorderly liquidation will be too great to handle, says Pramboon, who cites the restructuring of Chinese airline conglomerate HNA Group as an example. As with HNA, the new Evergrande will be lighter and retain only basic assets. ”

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However, the question is how much bond investors can expect to recover. According to Zhou, Evergrande can choose to pay employees and suppliers first in order to meet the government’s goal of financial and social stability. Its trade and other payables, including trade invoices that allow it to pay suppliers for goods and services already received at a later date, grew 13.5% to 829.2 billion yuan last year. Evergrande has been threatened with legal action for overdue payments by several companies.

Iris Chen, a Hong Kong-based credit analyst at Nomura, wrote in an August research note that investors in Evergrande’s dollar-denominated banknotes could get back only 25% of their money. This payment will mainly come from the sale of assets in the publicly traded subsidiaries, such as the electric car unit, which may receive a discount up to 60% over its current value “considering the lack of real commercial profitability and growth prospects”.
 
“A better sale performance by Evergrande could potentially improve the recovery,” she writes. Nevertheless, asset disposals too early can also have detrimental effects on the recovery value of USD bonds, since other creditors may advance the proceeds of the disposal to bondholders.”

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