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Note: This is an edited version of an article published earlier on our affiliates on 20 July 2021
- It was reported on 19 July that China Guangfa Bank (Yixing Branch) requested to freeze Hengda Real Estate’s assets (the property division of China Evergrande). Following a fall in Evergrande Group’s stocks and bonds, the US dollar bond due in March 2022 EVERRE 8.250% 23MAR2022 CORP (USD) plunged to 70 yuan, with its yield exceeding 80%.
- Let us start by understanding that the root problem stemmed from a loan given to a project subsidiary ‘Yixing Hengyu Real Estate Co., Ltd.’ (a subsidiary of Evergrande) by China Guangfa Bank branch in Yixing (a third tier city in Wuxi, Jiangsu Province).
- Large-scale domestic real estate developers typically run national projects where a corresponding project subsidiary is incorporated locally when a new project is developed. This results in independent assets and liabilities since each subsidiary deals with different suppliers.
- Yixing Hengyu Real Estate Co., Ltd. is believed to have failed to repay all the principal and interest in accordance with the terms of the loan contract, and therefore China Guangfa Bank filed with the Wuxi Intermediate People's Court for pre-litigation property preservation to prevent fund withdrawals without authorization. Approximately RMB 132 million assets were frozen to protect the bank’s rights and interests.
- But according to Evergrande Group, the loan was due to mature on 27 March 2022, and the bank abused the pre-litigation property preservation before it expired. As such, they are considering to take actions to file a lawsuit against the bank.
- Given the opposing arguments, it is difficult to determine who is right or wrong. Insiders have shared that a term of the loan states the borrower must repay the loan by instalments in accordance to the sales progress; when the sales reaches 70%, the borrower must repay the principal and interest in full.
- While China Guangfa Bank is of the view that the loan should be repaid according to the stated terms, Evergrande believes they have communicated sufficiently with the bank on the gradual repayment of its loan over the second half of 2021, yet the bank was dissatisfied and requested for a freeze of their property.
- Given the relatively small sum of 132 million yuan involved and lawsuit subject being a project subsidiary in Yixing City (out of the 800 projects Evergrande had as of last year end), we believe that this incident is insufficient to claim that Evergrande is facing a liquidity crisis.
- Nonetheless,
worries about domino effects have grown and such negative sentiments caused
banks in China to restrict loans to Evergrande. We believe Evergrande will
continue its negotiations with China Guangfa Bank to improve market sentiments and
prevent future occurrences of similar lawsuits.
(Read more: China Evergrande is surrounded by rumours again. What is happening this time? (Part 2))
- Despite the negative rumours, Evergrande’s
sales figures remain stable. The Group’s strengths in its asset portfolio are also not comparable
against other distressed or defaulted issuers. Hence, we believe that the
yield of its short-term bonds will rise and in turn improve the investment
attractiveness of Evergrande.
(Read our first update: China Evergrande is surrounded by rumours again. What is happening this time?)
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Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in EVERRE 7.500% 28Jun2023 Corp (USD) and EVERRE 8.250% 23Mar2022 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.
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