Evergrande recovery: Has the company avoided catastrophe?

For over two years the world’s top financial and economic experts have warned the collapse of China Evergrande is the biggest threat to global markets since the Global Financial Crisis.

A tidal wave of debt had been enveloping China’s second-largest property developer over many years, but it wasn’t until 2021 when the true extent of the Hong Kong-listed company’s problems were laid bare. As China’s economy slowed, the company could no longer meet its massive debt obligations.

Right now, China Evergrande has debts and liabilities of around US$300 billion. Its book of debt from direct foreign lenders sits at around $20 billion.

But even with this seemingly insurmountable debt burden, so far, the catastrophe many predicted has been avoided and there have been signs of success in the controlled Government-led restructuring of the property giant.

China Evergrande property sales resurgence

Chinese social media network WeChat has been China Evergrande’s communication method of choice in recent months. By sharing company updates on the network, Evergrande is able to avoid the mass global media coverage it would attract should the same updates be shared via market announcements or press releases.

Evergrande’s most recent WeChat update, posted this week, delivered one of the strongest signs yet that the company could be back on track.

The official account said the company has recorded 3.09 billion yuan (US$460 million) in property sales in April. This is a material increase on previous months in which sales had stagnated at around 20-30 million yuan, according to the company.

“We launched sales twice in December last year and in February this year, but they were unsuccessful. We were under great pressure, unimaginable,” said the post.

“At the beginning of April, we took advantage of the favorable conditions for vigorous construction, carefully planned, and launched the marketing work for the third time. This time we succeeded, and achieved a brilliant performance of 3.09 billion yuan in sales in April.

“The recovery of sales is too important for Evergrande, for the owners, for upstream and downstream partners, and for all creditors.”

China Evergrande
The positive China Evergrande sales update as it appeared on WeChat this week.

In recent weeks Evergrande’s has also appeared eager to spread the word about the resumption of construction works at a number of major projects.

On the official Evergrande Group East China account a series of images were shared this week showing workers on the site of major projects including, the Evergrande Peach Blossom Spring Town in Tangshan, Evergrande Royal Seaview Garden in Shaoxing, and the Shengzhou Evergrande Future City.

At the construction sites, every busy figure is working hard to secure delivery of the buildings. With full spirits, everyone threw themselves into this ‘return to work battle’ and worked together to achieve the project’s engineering goals,” says the post.

“Resumption of work, production, and delivery of buildings” is 2022 The most important work goal of Evergrande Group.”

China Evergrande
Images from construction sites in Eastern China, shared by China Evergrande on WeChat on Thursday (May 5, 2022).

Debt extension deals providing reprieve

While much uncertainty remains about Evergrande’s repayment obligations for its USD-denominated bonds, in recent weeks the company has successfully negotiated extensions for coupon payments on some of its largest onshore yuan-denominated bonds.

Holders of two bonds worth a total of US$3 billion voted in favour of a six month extension to a May 6 deadline for coupon payments.

This extension allows the company to continue working on a debt restructuring proposal, which insiders say is being led by Chinese Government advisers. Asia Markets understands creditors have been reassured the debt restructuring proposal will be unveiled during July.

While a default has technically been triggered on one of Evergrande’s USD bonds, the company is yet to default on an onshore bond – more evidence of the company’s desire the limit the potential fall out in China, at the expense of international creditors.

Evergrande’s has outstanding onshore bonds worth around US$9 billion, with outstanding offshore bonds totalling close to US$20 billion.

Slow and steady restructuring continues

Meanwhile, what’s been described as “liquidation by stealth” of the real estate group continues with major asset sales to Chinese state-owned enterprises. This is providing Evergrande with much-needed liquidity.

Most recently, Evergrande announced a Chinese state-owned enterprise had acquired its interest in the Crystal City construction project in Hangzhou for around US$575 million. The company said proceeds would be used to repay around US$138 million worth of construction fees already owing on the project and the rest would go into general working capital.

Earlier in the year Evergrande announced it had recovered a US$290 million capital investment it made into four projects and also settled liabilities associated with the projects worth around US$1.05 billion, via two seperate acquisitions by state-owned enterprises. They include:

  • Interests in Evergrande Daishan Garden in Chongqing, and Dongguan Evergrande Yuelong Terrace in Dongguan (both residential projects) to state-owned China Everbright Trust.
  • interests in a residential project in Foshan and the Fairyland theme park in the Nansha district to the state-owned Minmetals Trust.

The effective nationalisation of the projects follows news that Chinese Government officials have moved into Evergrande’s Shenzhen headquarters, with Evergrande management told to report directly to the Government working group.

Investors, creditors now holding their breath for delayed annual results

While there are now encouraging signs the global financial meltdown many experts predicted Evergrande could cause will be avoided, a clearer picture of the Evergrande situation will be revealed when the company’s audited annual result for the year ending 31 December 2021 is released.

And there is some cause for concern on that front after Evergrande told the market on 22 March the release would be delayed and published as soon as “practicable”.

“Due to the drastic changes in the operational environment of the Company since the second half of last year, the auditor has added a large number of additional audit procedures this year, which coupled with the effect caused by the COVID-19 outbreak, based on the information currently available to the Company, the Company will not be able to complete the audit procedures on time,” said the company.

There’s still no update on a release date.

China Evergrande’s Hong Kong listed shares (HKG: 3333) have since been in trading halt along with other Chinese property developers – including Shimao Group, Guangzhou R&F, and Kaisa – which have also delayed their audited annual result releases, citing similar reasons to Evergrande.

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