Evergrande faces 'tremendous' liquidity crunch as it hires debt restructuring advisors

Company's problems have escalated in recent days after several of its subsidiaries failed to repay wealth management products

China Evergrande Group has issued a dire assessment of its financial health, saying it faces “tremendous” liquidity strains and has hired advisors for what could be one of the country’s largest-ever debt restructurings.

The appraisal was Evergrande’s most downbeat since market confidence in the developer began deteriorating in May, and followed a spate of protests over the past week by angry homebuyers, retail investors and employees demanding the company make good on its obligations.

Evergrande’s dollar bonds and shares sank as markets priced in a near-certain likelihood of default. The extent of the losses facing investors will depend in part on whether Chinese authorities and state-run banks take steps to limit the fallout.

Without state intervention, the risk is that Evergrande enters a downward spiral. The developer said on Tuesday property sales will drop in the normally buoyant month of September because of waning confidence among homebuyers, who often need to give the company large down payments for properties that may take years to complete.

Evergrande said it had made “no material progress” on plans to sell stakes in its electric-car and property services units, adding that the planned disposal of its Hong Kong headquarters hadn’t been completed as expected. Asset sales had been one of the most important pillars of Evergrande’s plan to escape its cash crunch.

Shares of Evergrande fell as much as 10 per cent on Tuesday morning in Hong Kong and have lost about 80 per cent this year. Its electric-vehicle unit tumbled as much as 20 per cent. Evergrande’s 8.25 per cent dollar bond due in 2022 dropped 4.8 cents to 27.7 cents, according to Bloomberg-compiled prices.

The company’s liquidity problems have escalated in recent days after several of its subsidiaries failed to repay wealth management products, a key source of short-term funding for Evergrande and other developers. A backlash against the company’s plan to extend payment deadlines on the products has triggered protests at Evergrande’s Shenzhen headquarters and other offices across China.

Evergrande, which denied rumors late on Monday that it would file for bankruptcy, hired Houlihan Lokey and Admiralty Harbour Capital as joint financial advisers to assess the firm’s capital structure. Houlihan Lokey has one of the largest financial restructuring operations globally, having advised on some 1,400 cases with more than $3 trillion in debt claims since 1988, according to its website. Its largest case by assets was Lehman Brothers.

“It looks like they are working on debt restructuring after no concrete results on asset disposals, and the first task is to stabilise the holders of wealth management products, which could be a social issue,” said Daniel Fan, a credit analyst at Bloomberg Intelligence. “It seems the developer is working on rescheduling pretty much all onshore debt and the next step is to do the same for offshore investors.”

Evergrande has more than $300 billion in liabilities, almost half of which are payables including to contractors. The group had received down payments on yet-to-be-completed properties from more than 1.5 million home buyers as of December.

While Evergrande doesn’t have any bonds maturing until 2022, it faces $669 million in coupon payments this year, including $83.5m due on September 23 for a dollar note. Investors are closely watching the deadline given the potential for a debt restructuring. Fitch Ratings highlighted an increased chance of default on these interest payments when it slashed the firm’s ratings deeper into junk territory last week.

Evergrande said in August it was forced to suspend work on some projects due to overdue payables. The company’s billionaire founder, Hui Ka Yan, pledged to complete projects this month, issuing what he called a “military order” to ensure property construction and delivery.

The protests against Evergrande were sparked by its proposal late last week to impose lengthy repayment delays on holders of wealth management products. While the firm tweaked its plan on Monday to mitigate the backlash, retail and institutional investors will still face delays unless they accept repayment in the form of Evergrande-developed properties.

Two units failed to discharge their guarantee obligations on time for wealth management products worth 934 million yuan ($145m), the company said on Tuesday, adding it is in talks with issuers and investors on a repayment arrangement.

Updated: September 14th 2021, 10:12 AM
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