Indebted China Evergrande Group began to make progress with asset sales last week, but showed access to the capital markets is clearly blocked with the cancellation of a proposed Shanghai Star listing of its electric vehicle unit.
The Chinese property developer, which with its subsidiaries has almost US$20bn of US dollar bonds outstanding and around US$90bn of interest-bearing debt, has been trying to sell non-core assets to stave off a default.
Evergrande appeared to miss coupon payments on its US$2.025bn 8.25% 2022 bonds on September 23 and its US$1bn 9.5% 2024s on September 29, but has not confirmed it did so, and it has a 30-day grace period before a missed payment is considered a default.
The developer made a small step in its asset disposal plan by agreeing to sell part of its stake in Shengjing Bank to a state-owned enterprise for Rmb9.993bn (US$1.55bn). However, the transaction will not help Evergrande bondholders because the Shenyang-based lender has demanded that all net proceeds from the disposal be used to settle financial liabilities of the group due to the bank.
In a filing on September 29, Evergrande said one of its units has entered into an agreement with Shenyang Shengjing Finance Investment Group, a state-owned enterprise ultimately owned by the Shenyang SASAC, to sell a 19.93% stake in Shengjing Bank. The 1.753bn non-publicly traded domestic shares in the bank will be sold at Rmb5.70 per share.
Upon completion of the transaction, which still needs approval from regulators, Evergrande will still hold 14.57% in Shengjing Bank. Shengjing Finance's holding will rise to 20.79% to become the bank’s largest shareholder. Together with the stakes held by other local SOEs, the Shenyang government will hold 29.54% in the bank.
Separately, Reuters reported that the Chinese authorities are asking SOEs and state-backed property developers to purchase some of Evergrande's assets.
Evergrande had worse fortune elsewhere, as its Hong Kong-listed China Evergrande New Energy Vehicle Group on September 26 announced it has cancelled a proposed Shanghai Star listing after it warned it faced an uncertain future unless it gets a swift injection of cash.
The electric vehicle unit's H-shares fell as much as 26% on September 27, and closed 9.4% down at HK$2.02, for a total fall of 93.5% this year. They had rebounded to over HK$3 before Hong Kong markets closed for Friday's National Day.
Access blocked
Other capital market plans by Evergrande are likely to mirror the fate of the EV unit. Its online home and car sales platform Fangchebao in April sold a 10% stake to 17 investors, including Citic Capital and the family of the chairman of New World Development, for HK$16.4bn (US$2.1bn) ahead of a planned US IPO. In July, Evergrande was also reported to be considering spinning off its bottled water business in a Hong Kong IPO.
“Evergrande has been using this formula in the recent years to help them reduce debts. They do pre-IPO rounds, then cash in their stakes in or after the IPOs while the units raise capital to support their own growth. This, however, won’t work any more with the collapse of the group,” said a banker who has worked on Evergrande's transactions.
In August 2020, Evergrande Property Services raised HK$23.5bn from a pre-IPO investment led by Chan Hoi-wan, executive director of Hong Kong-listed Chinese Estates Holdings. Three months later, Evergrande pocketed around US$920m from the unit’s HK$14.3bn Hong Kong IPO through the sale of secondary shares.
On September 14 2020, four days before Evergrande announced Evergrande New Energy Vehicle would seek a Shanghai listing, the EV unit raised HK$4bn from a top-up placement with the participation of Tencent Holdings, Sequoia Capital, Yunfeng Capital and Didi Global.
The EV unit in January completed a HK$26bn private placement ahead of its proposed Star listing. The deal drew investors such as Greenwoods Global Investment, Chan Hoi-wan and Liu Minghui, president of Hong Kong-listed China Gas Holdings. By February, the EV unit was worth more than Ford and GM.
Evergrande Group said in August that it was “in discussions with several independent third-party investors” on the sale of part of its interest in Evergrande New Energy, but no further progress was released.
“Evergrande will continue to look for buyers to take over its non-core businesses, such as new energy unit, HengTen Networks, health management unit, and Evergrande Spring,” said Bruce Pang, chief economist at China Renaissance Securities.
No direct intervention
Reuters on September 28 reported that Beijing is prodding SOEs and state-backed developers to purchase some of Evergrande's assets, but the central government is unlikely to intervene directly to resolve the crisis in the form of a bailout. The report cited people with knowledge of the matter, including four in government and regulatory bodies.
Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, the report cited the people as saying.
China Vanke, China Jinmao Holdings and China Resources Land are among the government-backed property developers that have been asked to purchase assets from Evergrande, the report said.
The People's Bank of China on September 27 vowed to protect consumers exposed to the housing market in a broad-ranging statement posted on its website, without mentioning Evergrande, and injected more cash into the banking system, which was viewed as an attempt to calm the market.
"China's authorities will seek to prevent Evergrande's troubles from hurting the company's home-buyers, suppliers and contractors. However, the company's financial strife could restrict funding access for property companies and Chinese issuers, damage the asset quality of certain banks, and disrupt the real estate market, which is an important driver of economic growth," said Michael Taylor, Moody's Asia Pacific chief credit officer.
Moody's said Evergrande's credit distress will have a limited direct impact on the sovereign, but a prolonged slowdown in the property sector would hurt regional and local governments' revenue from land sales.
Research firm Lucror Analytics said it views positively any prospective large scale sale of assets to SOEs as "this may help alleviate Evergrande's short term liquidity and go some ways to restoring market confidence in the sector".
Lucror also noted that a US$260m private bond issued by Evergrande unit Jumbo Fortune is due on October 3. "Apparently Evergrande is a guarantor of the bond. The failure to repay this bond is unlikely to cause any immediate pressure on Evergrande, as jumbo creditors may first have to exhaust legal action against that entity before pursuing guarantors," it wrote.