China braces for restrusturing Evergrande Group
Along-awaiteddebtrestructuringofChina’sEvergrandeGroup
mayfinallybeathand,
posinganewtestforXiJinping’sgovernmentas
ittriestoreininthecountry’s
financialexcesseswithouthamperingeconomicgrowth.
Thebeleaguereddevelopersaidinastockexchangelate
Fridaythatitplansto“activelyengage”withexternal
creditorsintherestructuringplan,offeringitsfrank
acknowledgmentsofarthatits$300billionofforeignand
domesticliabilitieshavebecomeunsustainable.
AbarrageofstatementsfromChineseregulators–manyofwhichfelljustminutesafterEvergrande’s
announcement–suggestauthoritiesarescramblingtocontainthefalloutfor
financialmarketsandhomeownersratherthanorchestratingabailout.
ThegovernmentofGuangdong,thesouthernprovince
whereEvergrandeisbased,summonedfounderHuiKaYan
toexpressconcernaboutthecompany’sannouncementand
saiditwouldsendateamtothedevelopertoensure“normal”
operations.ThePeople’sBankofChinablamed
Evergrande’sproblemson“badcompanymanagement”and
“recklessexpansion”.
Thesurgeofactivitycomesafterseveralweeksofrelativecalm
forEvergrande,whichhasmadelast-minutepaymentsonitsdollarnotessincelateOctoberatthe
invitationofBeijing.Friday’sdatasuggestedtheworld’smost
indebteddevelopermaystruggletomakefurtherpayments
duringgraceperiods,evenafteraseriesofpersonalassetsales
byHuithatappeardesignedtohelpEvergrandemeetitsdebt
obligationsinthenearterm.
Thecompany’snexttestcomesonMonday.That’swhenthe30-daygraceperiodexpiresontwodollarbondinterestpayments
thatwereinitiallydueonNovember6: a $41.9millionnotepayablein2022and$40.6millionintereston
asecurityduethefollowingyear.Bothbondswereissuedby
SenriJourneyLimited.
ThequestionforglobalmarketsiswhetherBeijingcan
coordinatetherestructuringwithoutalteringthebroader
realestatesector,whichaccountsfornearlyaquarterof
economicoutput.Policymakershaveahistoryofabandoning
effortstoreinindeveloperswhenriskstogrowthmount,
althoughXiappearsmoredeterminedthanhispredecessors
toeliminatethemoralhazardsthathaveallowedcompanies
likeEvergrandetoexpandsoquickly.
OneriskisthatBeijingmaynothaveacompletepictureofthe
indebtednessoftheEvergrandeanditspeers.TheShenzhen-baseddeveloperindicatedinitsstockexchangefilingFridaythat
itmaynotbeabletohonoritspledgetoguaranteerepayment
ona $260millionnoteissuedbyJumboFortuneEnterprises
jointventure, acommitmentmanyEvergrandeinvestorsdidn’tknowexisted.
Untilafewmonthsago.
WhileitwillbeimportanttomonitorhowtheEvergrande
restructuringprogresses,theprospectsforarenewedpanicin
China’screditmarketsarelow,accordingtoanalystsatChina
InternationalCapitalCorp.Oneofthelargestinvestmentbanks
inthecountry.AnalystsYanShuandEricYuchangwroteina
reportthatrealestatefirmswithpoormanagementandhigh
financialriskswillbe“phasedout”,buttheauthoritiesarelikely
toensurethathigh-qualitydevelopersretainaccesstofinancing.
AnalystswrotethatthefalloutfromEvergrandeislikelytobe
“controlledwithinarelativelylimitedrange.”
BondinvestorshavebeenanticipatingtheEvergranderestructuring
formonths,asthecompany’s2025dollarbondhasbeentrading
atlessthan30centssincetheendofSeptember.China’sjunk
bondindexfellforathirddayonFriday,takingyieldsto22%,
althoughgainsininvestment-gradebondssuggestbondholdersaremorerelaxedaboutthe
possibilityofcontagionthantheywereearlierthisyear.
Investorsareincreasinglydistinguishingbetweenweakerand
strongerborrowersaftertheChinesegovernmenttooksteps
toalleviatealiquiditycrunchfortop-rateddevelopersinrecentweeks.AsidefromEvergrande,money
managersarepreparingforapossibledefaultbyKaisaGroup
HoldingsLtd.,whichfacesa $400millionbondmaturityonTuesdayafteritfailedtoswap
fornewnotesmaturingafter18months.
ForEvergrande,thenextstepmaybeenteringaninformal
debtfreezeasitcontinuestotrytonegotiatewithcreditors,
accordingtoBloombergIntelligenceanalystDanielleFan.
“Itislikelythatthematuritieswillbeextendedbasedonthe
sustainabilityofthedebt,”hesaid. “Oneoptiontoimprovetheprocessistotiesomeofthe
paymentbacktoitsoffshoreassets,”Fanadded,suchasthe
HongKong-listedelectriccarunit.
Evergrande’sexternalcreditorsarewidelyexpectedtofall
nearthebottomofthelistofprioritiesinrestructuring,behind
thenearly1.6millionhomeownerswhohavemadedownpayments
tothedeveloperonrealestate,localsuppliers,Evergrande
employees,andindividualinvestorswhohavepurchasedwealth
managementandproductsTrustassociatedwiththecompany.
ManyWMPsandtrustsassociatedwithEvergrandehavealready
defaulted,restructured,ordefaultedonpayments.
