- Evergrande continues to dominate headlines. Recently, there were several protests in China after Evergrande’s wealth division announced that they would temporarily suspend repayment on its wealth management products.
- With the situation aggravating, the price of Evergrande’s USD bond due in March 2022 dropped below $30 again, and returned to its historical low level as that of last Thursday (9 September). Now the bond is trading without accrued interest.
- Meanwhile, since China Cheng Xin International downgraded Hengda Real Estate rating from AA to A, onshore bond trading has been halted for one day on 16 September due to the change in transaction method.
The Latest News
Last Tuesday (7 September), Moody's downgraded Evergrande’s issuer rating to Ca, and its senior unsecured bond rating to C, which is considered the lowest level in the rating mechanism. Fitch also followed with another downgrade the next day and pointed out that they think "a default of some kind appears probable."
On 8 September, REDD Intelligence informed two Chinese banks that Evergrande planned to suspend interest payments on loans due to them on 21 September. REDD Intelligence also added that the company might suspend all payments to its wealth management products starting on the same day. The news caused bond prices that were already trading at distressed levels to plummet again, and all USD bonds across the curve plunged to $25 or below.
However, in the afternoon of the next day (9 September), some sources reported that China’s Financial Stability and Development Committee Beijing signed off on Evergrande’s proposal to delay payments to some creditors, leading to a rebound in bond prices. This is what we mentioned previously about the function of creditor committee: to ‘centralize’ key creditors such as banks and trust firms, allowing the Government to issue timely instructions to them.
Just when investors thought Evergrande could catch a break, things took a turn for the worse again. With the non-payment by its wealth division, many clients and staff who invested into its wealth management products started protesting at the company’s office. What caused public outrage was that many of Evergrande’s senior management had already withdrawn their investments beforehand. Du Liang, the managing director of Evergrande‘s wealth division even admitted that he had redeemed his personal investments at the end of May, which greatly reduced investors’ confidence in Evergrande.
This time, Evergrande’s response was quicker than before. At the Evergrande Wealth Conference last Friday (10 September), Chairman Hui Ka Yan said that the group must ensure the full repayment of all matured wealth management products as soon as possible, and the process must be fair and just. After that, the group released three repayment schemes for investors to choose from, including cash payment by installments, physical assets and offsetting housing payments. Although there is no official data showing the scale of Evergrande’s wealth division, market rumours estimate that it has raised 40 billion RMB through these wealth management products.
Evergrande’s Official Announcement
This Wednesday morning (14 September), Evergrande issued an announcement about the Group’s latest developments, including its sales progress, measures to ease the liquidity issues and engagement of financial advisers.
Similar to what we mentioned previously, Evergrande’s plans to sell assets are not going smoothly. They are unable to find suitable investors to buy over their equity interests in Evergrande New Energy Vehicle and Evergrande Property Services. The disposal of the China Evergrande Centre in Hong Kong has not been completed either.
In addition, the suspension of construction work is severely dampening the confidence of potential homebuyers, causing a sharp decline in the Group's sales. July and August have seen a significant decreasing trend, and we expect sales in September to continue falling.
One item to note is a paragraph in the announcement that appears to refer to Evergrande’s wealth division’s non-payment issues. It mentions that the Group’s subsidiaries failed to discharge their guarantee obligations as promised for the wealth management products – an approximate 934 million RMB. It is also followed by “If the Group is unable to meet its guarantee obligation or to repay any debt when due or agree with the relevant creditors on extensions of such debts or alternative agreements, it may lead to cross-default.”
Poring through the offering circulars of Evergrande’s USD bonds, we identified that the condition triggering cross-default is the default of the Group or any restricted subsidiary’s indebtedness with an amount of $20 million USD or more. For the definition of indebtedness, while trade payables are not included, wealth management products with guarantee obligations may be included. If the above is true, Evergrande faces a greater urgency to deal with the repayment plan of matured wealth management products to avoid a cross-default that would affect offshore USD bonds.
Evergrande has appointed Houlihan Lokey and Admiralty Harbour Capital as financial advisers. The former has provided consulting services for several of the largest bankruptcy and restructuring cases in the United States, including companies such as Lehman Brothers, General Motors, WorldCom, Washington Mutual, etc., reflecting the increasing probability of Evergrande's debt restructuring.
Our Current View
If the bond defaults and the group enters into debt restructuring, offshore bondholders will have the right to claim against the offshore and onshore assets held by China Evergrande Group. We believe that the Group’s most important assets are the equity ownership of several companies (see Table 1).
Table 1: Key Listed Companies
|
Company |
Remarks |
|
Evergrande Property Services |
Market cap about 44.3 billion HKD, 61% ownership |
|
Evergrande New Energy Vehicle |
Market cap about 34.5 billion HKD, 65% ownership |
|
HengTen Networks |
Market cap about 23.6 billion HKD, 27% ownership |
|
Shengjing Bank |
Market cap about 61.6 billion HKD, 35% ownership |
|
Calxon Group |
Market cap about 7.0 billion RMB, 28% ownership |
|
Source: Company announcements, HKEX, Shenzhen Exchange, Hithink Data as at 16 September 2021 |
|
By looking at the situation from the perspective of offshore assets and placing the onshore subsidiary Hengda Real Estate aside, we estimate that China Evergrande’s standalone debt size is about 110 billion yuan at end-June, based on the amount of its outstanding offshore bonds. The above assets in Table 1 should provide some cushion for the recovery value of these bonds.
Currently, Evergrande’s bond prices are trading at a level lower than the defaulted China Fortune Land and Sichuan Languang, as well as the technically defaulted Suning Appliance’s USD bond. Considering Evergrande has a higher quality asset portfolio, we stand by our analysis that the haircut level under debt restructuring will not be lower than its current price, and therefore the incentive to sell the bond now is low.
Nonetheless, we understand that as prices of Evergrande’s assets continue to fluctuate, sales of equity may suffer from a big discount, which will eat into the bonds’ recovery value. It may also take a long time for a repayment plan to be developed during the restructuring process. As such, investors should also take time value into consideration.
Coming up next, investors need to pay close attention to Evergrande’s attitude towards making payments on bond coupons. Currently, its offshore and onshore bond coupons due in September and October stand at approximately 550 million USD. Coupons of EVERRE 8.250% 23MAR2022 CORP (USD) to be repaid next Thursday is approximately 83.5 million USD, and has a 30-day grace period.
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