China Evergrande shares plunge as it teeters on brink of default
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China Evergrande Group has begun to return a portion of money owed by buyers of its investment products. This was weeks after people protested at the Shenzhen headquarters for not paying its debts.
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After lurching from deadline to deadline, China Evergrande Group is again on the brink of default, with its pessimistic comments condemning its stock to a record low just as direct state involvement raises hope of a managed debt restructuring.
Evergrande, who has already made three coupon payments at 11 o’clock in the last two month, will face the expiration of the 30-day grace period. The dues for the remainder amount to $82.5 million.
But a statement on Friday saying creditors had demanded $260 million and that it could not guarantee funds for coupon repayment prompted authorities to summon its chairman — and wiped a fifth off its stock’s value on Monday.
Evergrande was once China’s most-selling developer. It now has more than $300 billion of liabilities. This means that a disorderly crash could affect the entire property sector.
Its Friday statement was followed by one from authorities in its home province of Guangdong, saying they would send a team at Evergrande’s request to oversee risk management, strengthen internal control and maintain operations — the state’s first public move to intervene directly to manage any fallout.
Statements were also issued by the central bank, banks and insurance regulator, and securities regulator, indicating that there was potential to limit risk to property sectors.
Analysts believe Evergrande is likely to have entered into a managed restructuring of its debt-assets through the concerted efforts of authorities.
Morgan Stanley stated that such coordination would require coordination among authorities in order to manage property projects and negotiations with creditors onshore to secure financing.
The U.S. investment banking reported that regulators will likely facilitate discussions with offshore creditors about debt restructuring after operations stabilize.
Evergrande shares plunged 20% after the flurry in statements and closed at HK$1.82 on Monday.
Its November 2022 bond — one of two bonds that could go into default upon Monday non-payment — was trading at the distressed price of 18.560 U.S. cents on the dollar, compared with 20.083 cents at Friday’s close.
The liquidity squeeze
Evergrande’s financial difficulties have made it difficult to raise capital by asset disposal. Chairman Hui Ka Yan has been asked by the government to borrow money from Evergrande.
This firm is not the only one that has been left without liquidity by regulatory restrictions on borrowing. It was among many developers who have suffered from credit downgrades, offshore debt defaults, and selling of developer shares and bonds.
In an effort to stop the chaos, regulators in October urged banks not to lend to developers for their normal financing requirements and gave more opportunities to real estate companies to purchase domestic bonds.
Premier Li Keqiang announced Friday that China would cut its bank reserve requirements ratio in order to release funds.
However, it may be necessary to increase policy-easing in spring in order to avoid a steep downturn in property sector due to increased repayment pressure, Nomura, a Japanese investment bank, said in a Sunday report.
Quarterly dollar bond repayments are expected to almost double to $19.8 trillion in the first quarter, and $18.5 billion the second.
CGSCIMB Securities on Monday said that Evergrande would not benefit from easing measures, such as selling domestic bonds. There isn’t any demand for the notes.
Evergrande’s inability to sell projects — with almost zero November sales — also makes short-term debt payments “highly unlikely,” the brokerage said.
Begin to spread contagion
Sunshine 100 China Holdings Ltd, a smaller developer, announced Monday that it defaulted upon a $170 Million dollar bond due Dec. 5. This was “due to liquidity problems arising out of the adverse effect of many factors such as the macroeconomic climate and the real-estate industry.”
According to it, cross-default provisions in certain other debt instruments will apply to the default.
Last week, Kaisa Group Holdings Ltd — China’s largest offshore debtor among developers after Evergrande — said bondholders had rejected an offer to exchange its 6.5% offshore bonds due Dec. 7 , leaving it at risk of default.
Sources tell Reuters that the developer is in talks with bondholders to extend deadline for $400 million debt repayment.
China Aoyuan Property Group Ltd, which is a small rival to China Aoyuan Property Group Ltd also announced last week that creditors had demanded payment of $651.2 Million due to several credit-rating declines. It said it might not be in a position to pay because of a shortage of liquidity.
Guo Zi Wen, Chairman of Aoyuan on Friday advised executives in an internal meeting that they should have a war mindset to secure operation and delivery of projects and fund repayment. A person who has direct knowledge told Reuters.
According to the source, these tasks will become priority for the developer. They will not negotiate bond repayments with professional institutions in Hong Kong.
Aoyuan didn’t respond to my request for comment.
Close to 8% fell in the shares of the developer on Monday. Kaisa’s share price fell by 3.8% while Sunshine 100 dropped 14%
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