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China Evergrande Shares Slide After $2.6bn Deal Collapses

Developer wins a 3-month extension on maturity of a $260m bond, but it has scrapped a deal to sell a 50.1% stake in its property services unit to Hopson, so chances of it avoiding default look unlikely.


Evergrande
Evergrande has now been declared in default by a second major ratings agency. Photo: Reuters.

 

There was good and bad news for China Evergrande Group on Thursday, with the group managing to secure an extension on the maturity of a defaulted $260m bond issued by its joint venture, according to information provider REDD. But overall things look grim, with the company’s shares sliding as much as 14% after a deal to sell a $2.6-billion stake in its property services unit fell through.

Evergrande won a more than three-month extension to the maturity of a bond issued by joint venture Jumbo Fortune Enterprises, that Evergrande guaranteed, beyond October 3 after agreeing to provide extra collateral, REDD reported, citing holders of the bond.

A source familiar with the matter said that Evergrande chairman Hui Ka Yan had agreed to put personal wealth into a Chinese residential project tied to the bond to ensure it gets completed, paving the way for bondholders to get their dues.

The bondholders agreed to the proposal early this week to avoid a messy collapse of the developer or a drawn-out legal battle, the source told Reuters.

A more troubling development came late on Wednesday, when Evergrande said it had scrapped an agreement to sell a 50.1% stake in Evergrande Property Services Group to Hopson Development Holdings, because the smaller rival had not met the “prerequisite to make a general offer”.

Both sides appeared to trade blame for the setback, with Hopson saying it does not accept “there is any substance whatsoever” to Evergrande’s termination of the sales agreement, and it is exploring options to protect its legitimate interests.

The deal is the developer’s second to collapse amid its scramble to raise cash in recent weeks. Two sources told Reuters last week the $1.7-billion sale of its Hong Kong headquarters had failed amid buyer worries over Evergrande’s dire financial situation, which has rattled global markets.

The latest setback also comes just ahead of the expiry – on Saturday – of a 30-day grace period for Evergrande to pay $83.5 million in coupon payments for an offshore bond, at which time China’s most indebted developer would be considered in default.

Evergrande in an exchange filing on Wednesday said the grace periods for the payment of the interest on its US dollar-denominated bonds that had become due in September and October had not expired. It did not elaborate.

“The scrapped transaction has made it even more unlikely for it (Evergrande) to pull a rabbit out of a hat at the last minute,” said a lawyer representing some creditors, requesting anonymity as he was not authorised to speak to the media.

“Given where things are with the missed payments and the grace period running out soon, people are bracing for a hard default. We’ll see how the company addresses this in its negotiations with creditors.”

 

Recouping Losses

Trading in the Hong Kong-listed shares of China Evergrande, its property services unit and Hopson resumed on Thursday after a more than two-week suspension. Evergrande closed down 12.5% and its property services unit dropped 8%, while its electric vehicle arm eased 2%. Shares of Hopson jumped 7.6%.

Mainland China’s property index gained nearly 2%.

China Evergrande was once the country’s top-selling developer yet is now reeling under more than $300 billion of debt, prompting government officials to come out in force in recent days to say the firm’s problems will not spin out of control and trigger a broader financial crisis.

Ratings agency Fitch said China’s attempts to preserve strengthened risk controls over the property sector without magnifying a growth slowdown illustrate the difficult trade-offs its policymakers are facing.

If policy easing is too cautious, stress could spread to other parts of the economy and the financial system, while a substantial loosening of credit conditions could raise system leverage and set back efforts to control financial risks, it added.

Since the government started clamping down on corporate debt in 2017, many real estate developers have turned to off-balance-sheet vehicles to borrow money and skirt regulatory scrutiny, analysts and lawyers said.

 

Worsening Contagion

Statements from other property developers on Thursday exacerbated investor concern of contagion.

Chinese Estates Holdings Ltd said it would book a loss of $29 million in its current fiscal year from the sale of bonds issued by property developer Kaisa Group Holdings Ltd.

Modern Land (China) Co Ltd said it had ceased to seek consent from investors to extend the maturity date of a dollar bond due on October 25. Its shares were suspended from trading on Thursday.

While Chinese high-yield spreads, as indicated in an index of Chinese corporate high-yield issuers, continued to narrow as of Wednesday evening US time, Modern Land’s decision weighed on investors’ mood, said Clarence Tam, fixed income portfolio manager at Avenue Asset Management in Hong Kong.

“The market is worried all single-B companies will choose not to pay,” he said.

Investor concerns were not confined to offshore markets.

A September 2023 bond from developer Aoyuan Group Co was the biggest loser of the day among corporate bonds on the Shanghai Stock Exchange, according to exchange data, falling 10% to trade at 88.65 yuan.

Fitch downgraded Central China Real Estate to “B+” from “BB-” with a negative outlook on Thursday, followed a similar action by Moody’s, reflecting the developer’s weakened business profile and limited funding access.

 

  • Reuters with additional editing by Jim Pollard

This report was updated with new information on October 21.

 

ALSO READ:

China Officials Play Down Risk of Evergrande Spilling Over

China Evergrande Pays Locals As Offshore Default Looms

Plan to Sell Evergrande Unit Falls Through: FT

 

 

 

Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.

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