Explanation: What’s next for China Evergrande after missing coupon payment

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The China Evergrande Center building sign is seen in Hong Kong, China on September 23, 2021. REUTERS / Tyrone Siu / File Photo

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HONG KONG, Dec. 7 (Reuters) – Some offshore bondholders of the China Evergrande Group (3333.HK) failed to receive coupons after a 30-day grace period ended, four people in the know said of the issue, pushing the money- real estate developer short of formal default.

Failure to pay $ 82.5 million in interest payments due last month would trigger a cross-default on the company’s roughly $ 19 billion in international bonds and put the developer at risk of becoming the biggest default payment from china. Read more

WHAT IS EVERGRANDE?

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President Hui Ka Yan founded Evergrande in Guangzhou in 1996. It is China’s second-largest real estate developer, with revenues of $ 110 billion last year, $ 355 billion in assets and over 1 300 developments across the country. It was listed in Hong Kong in 2009.

Evergrande has grown rapidly thanks to a wave of land purchases financed by loans and the sale of apartments quickly at low margins. It employed 163,119 people at the end of June, according to its interim report.

The slowdown in growth led it to branch out into businesses such as insurance, bottled water, soccer, and electric vehicles (EVs).

HOW WERE CONCERNS ABOUT DEBT?

In September last year, a leaked letter showed Evergrande begging for government support to approve a now-abandoned backdoor listing. Sources told Reuters the letter was genuine; Evergrande called it fake.

In June, Evergrande said it failed to pay some negotiable instruments on time, and in July a court froze a $ 20 million bank deposit held by the company at the bank’s request.

The company said in late August that construction on some of its developments had halted due to missed payments to contractors and suppliers. And in September, he asked for an extension of payment for the trust and bank loans. Read more

Liabilities, including debts, stood at 1.97 trillion yuan ($ 306 billion) at the end of June, equivalent to 2% of China’s gross domestic product.

HOW DID EVERGRANDE REDUCE DEBT?

Evergrande stepped up efforts to reduce debt last year after regulators introduced caps on three debt ratios, dubbed the “three red lines.” Its goal is to meet these requirements by the end of 2022.

He offered deep discounts on residential developments to drive sales and sold the bulk of his commercial properties. As of the second half of 2020, it has completed a secondary stock sale of $ 555 million and raised $ 1.8 billion by listing its property management unit, while its EV unit has sold a stake of 3, $ 4 billion.

In September, he said that plans to sell assets and shares had not made significant progress. He has since sold new company shares and stakes in units such as HengTen Networks Group Ltd (0136.HK) to raise capital.

WHAT IS THE RISK?

China’s central bank said in 2018 that companies, including Evergrande, could pose a systemic risk to the financial system.

The company’s liabilities involved as many as 128 banks and more than 121 non-bank institutions, according to the leaked letter.

Late repayments could trigger cross defaults, as many financial institutions are exposed through direct loans and indirect holdings through different financial instruments.

WHAT ABOUT OPERATIONS OUTSIDE OF MAINLAND CHINA?

In Hong Kong, Evergrande has an office tower and residential developments, as well as extensive undeveloped land.

It has spent billions of dollars to acquire stakes in developers of automotive technologies, notably the Swedish NEVS and the Dutch e-Traction. It also has joint ventures with the German Hofer and the Swedish Koenigsegg.

WHAT ARE THE EVERGRANDE AND OWNERSHIP REGULATORS SAYING?

The authorities, including Vice Premier Liu He, the central bank and the securities regulator, assured the markets that the risks to the real estate sector and the economy were controllable, and that the problems of Evergrande were mainly due to its ‘own mismanagement’ and ‘meteoric expansion’.

In coordinated statements on Friday, the People’s Bank of China said the short-term risk caused by a single real estate company would not jeopardize the fundraising in the market in the medium to long term, and that home sales, purchases of land and funding “have already returned to normal. in China”.

WHAT’S NEXT FOR EVERGRANDE?

Evergrande said Monday it has set up a risk management committee including heads of state-owned companies to help “mitigate and eliminate future risks.”

This came after the Guangdong provincial government announced that it would send a team to Evergrande at the developer’s request, which analysts said indicated Evergrande would start handling debt asset restructuring.

WHAT WILL DEBT RESTRUCTURING LOOK LIKE?

Morgan Stanley said such a process would involve coordination between authorities to maintain operations of real estate projects and negotiations with onshore creditors to secure funding for project completion.

Regulators would also likely facilitate debt restructuring talks with offshore creditors once operations stabilize, Morgan Stanley said.

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Reporting by Clare Jim; Editing by Sumeet Chatterjee and Christopher Cushing

Our standards: Thomson Reuters Trust Principles.


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