On a deadline

Evergrande’s cash scramble spooks investors


In the headlines, yet again

Internet conglomerate LeEco and solar energy firm Hanergy are two of the more high-profile companies to run into financial distress in recent years. Before their cash crisis became crippling, both spent heavily on electric vehicle (EV) ventures. Hanergy even flaunted the prospect of a solar-powered car (see WiC333).

There was a certain business logic at the time. Barriers to entry in the sector were seen as insubstantial, with lots of companies declaring an interest. Investment was also welcomed by the government, which wants at least 60% of car sales to be electric by 2035. That raised hopes of policy support and state subsidies.

Perhaps that was a factor in why China Evergrande – the world’s most indebted property firm, according to Bloomberg – opted to bet big on EV as well. Two years ago it took a stake in LeEco’s struggling EV start-up (see WiC416), although that partnership soon unravelled. It then secured a large plot of land from the Guangzhou government to start production on behalf of its new EV unit Evergrande New Energy. The same entity received about Rmb3.5 billion ($518 million) of investment from the likes of Tencent and Didi Chuxing in early August.

Getting some of China’s biggest internet firms on board was encouraging news, albeit in a fundraising that looked tiny compared to the parent group’s debt load of about $120 billion, or 4.5 times Evergrande’s market capitalisation in Hong Kong as of this week.

In fact, there have been questions about Evergrande’s financial wellbeing almost as far back as its initial IPO in 2009. The scepticism intensified last month on news of a new “three red line” test that prevents more leveraged property firms from raising more debt (see WiC510). And investors were spooked again last week when a document did the rounds on social media breaking down Evergrande’s debt load in more detail.

Reportedly, it was part of a petition sent by the company to the Guangdong provincial government pleading for its support for the Shenzhen listing of its main property development unit (no real estate firms have been given the go-ahead to IPO by mainland regulators for nearly seven years). In the event that it was unable to float its core business, Evergrande warned the local bureaucrats it would need to repay more than Rmb130 billion to investors that had provided a pre-IPO financing deal.

The underlying message, Hong Kong’s Ming Pao newspaper noted, was a warning that the repayment would chew up almost all of Evergrande’s available cash, triggering risks for the financial system as a whole.

News of the letter sent Evergrande’s bonds into freefall and the price of its shares in Hong Kong tumbled too. Banks were also reported to be blocking the company from drawing down on unused credit lines.

Evergrande responded quickly with a “Solemn Declaration” to the stock exchange in Hong Kong, insisting that the document was a malicious fabrication (“people with knowledge of the matter confirmed its authenticity,” Reuters countered).

As we reported last month, Evergrande has been championing its biggest-ever apartment sales push and it sent out a separate circular last week underlining that revenues have been robust. But speculation about its financial condition won’t help the sales effort, analysts have pointed out, because buyers could be reluctant to put down deposits on contracts for off-plan homes.

In the meantime Evergrande is pursuing other ways of raising cash, including a spin-off of its property management unit in Hong Kong likely to raise as much as $2 billion. There are reports that Evergrande New Energy – its electric vehicle business – might apply for a secondary listing on Shanghai’s STAR Market as well, although an IPO of its core unit holding most of its real estate assets would do most to stabilise its financial position.

At least there was better news for the property giant on Wednesday, when a group of its strategic investors extended the deadline on the repayment of their loan, giving it more time to find the cash. Evergrande’s shares immediately surged almost 14% as a result.

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