Evergrande shares tank after $2.6bn deal collapses

Deal with Hopson is developer's second to collapse and market sentiment remains fragile despite reassurances from Beijing

Shares of China Evergrande Group slid as much as 14 per cent on Thursday after a deal to sell a $2.6 billion stake in its property services unit fell through, in the latest blow to the developer whose massive debt woes have rattled global markets.

Evergrande said on Wednesday it had scrapped a deal to sell a 50.1 per cent stake in Evergrande Property Services to Hopson Development as 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 $1.7bn sale of its Hong Kong headquarters had failed amid buyer worries over Evergrande's dire financial situation.

The latest setback also comes just ahead of the expiry 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.

In an exchange filing on Wednesday, Evergrande 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."

Trading in the Hong Kong-listed shares of China Evergrande, its property services unit and Hopson all resumed on Thursday after a more than two-week suspension. Evergrande trimmed opening losses and was down 9.8 per cent in early trade. Its property services unit dropped 5 per cent, while its electric vehicle arm plunged as much as 10.3 per cent. Shares of Hopson rose 5.6 per cent.

Mainland China's property index gained nearly 2 per cent.

Evergrande was once China's top-selling developer, yet is now reeling under more than $300bn 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.

The string of official reassurances are likely aimed at soothing investor fear that the developer's debt crisis could ripple through China's broader property sector, which contributes around a quarter to the country's economic growth.

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.

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

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

Modern Land 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.

Updated: October 21st 2021, 4:58 AM
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