Risky real estate

Xu Jiayin: scrambling for cash

At a typical ‘Big Dee Club’ night – where tycoons gather to play card games – the money wagered can be huge (see WiC364). One member of the group, Henan-born tycoon Xu Jiayin, won’t have been put off by the bigger betting. Xu is a bold punter in his own right – at least with the assets of his property conglomerate Evergrande.

Between 2016 and 2017, Xu raised a total of Rmb130 billion ($19.6 billion) from 27 equity investors, promising to buy back the total of their stakes in Hengda Real Estate if it didn’t secure regulatory approval for a backdoor listing by January 31, 2021.

The backdoor listing was supposed to be conducted on Shenzhen’s bourse, where Evergrande would inject its core property assets into a shell company called Shenzhen Special Economic Zone Real Estate.

As the deadline for the deal came closer into view there had been much speculation on whether Evergrande could complete the listing in time. The success of the restructuring became all the more material because the homebuilder – the world’s most indebted – has been under immense pressure to comply with new government rules that cap leverage ratios for property firms at 100% net debt to equity, 70% debt to assets, and at least one-to-one for cash against short-term borrowings (the so-called ‘three red lines’; see WiC510).

However, on Monday Evergrande filed to the Hong Kong Stock Exchange a notice saying that its board had terminated the reorganisation plan. But the company has also avoided a repayment to most of Xu’s cohort of 27 backers (including Suning) that would have drained almost the entirety of its cash and cash equivalents.

The majority of the strategic investors have consented to continue to hold their interests in Hengda, Evergrande said. Another group is signing supplemental agreements to extend their loans, while Evergrande is in negotiations to buy back the stakes of a small minority of the original investors.

Commentators are not surprised that the reorganisation plan was scuppered. That’s because the Chinese government hasn’t given the green light to a single IPO by a property developer since 2014. Partly this is to check the potential for runaway real estate prices but also to discourage high-octane borrowing in the property sector.

In fact, with a debt load of $120 billion as of June – more than the liabilities of New Zealand, the Financial Times points out – Evergrande could have probably triggered a doomsday scenario in its own right if it failed financially. “It is not just a question of the size of Evergrande’s borrowings,” warned Henny Sender, the FT’s chief correspondent. “Its debt is widely held, circulated through shadow banks into retail hands through wealth management products, as well as sitting on bank balance sheets.”

Evergrande seemed to be playing on those fears in a letter to government officials that warned of “cross defaults” in its borrowings if it wasn’t given approvals to list its core real estate assets in Shenzhen (a move that the company later denied: see WiC513).

The idea was that the new vehicle could achieve a higher valuation in the A-share market compared to a sale of Hong Kong’s H-shares, and thus underpin better terms for future financings. Its sale of stakes in Hengda to strategic investors had implied a valuation of about Rmb425 billion, almost three times the market value of the developer’s Hong Kong-listed shares, Bloomberg has reported. But Evergrande’s failure to secure the backdoor listing in Shenzhen means that it will have to rely more on equity placements in Hong Kong, as well as spin-offs and asset disposals to manage its net debt-to-equity ratio down towards the 100% target.

Sure enough, on November 1 it announced that it will sell its 41% stake in Guanghui Industrial, China’s largest car dealer, to state-owned Shenergy Group for Rmb15 billion. Guanghui, bought two years ago, was seen as Evergrande’s first step towards building an electric vehicle empire (see WiC459). The sale, however, is not expected to impinge on Evergrande’s plan to list its new energy vehicle unit on Shanghai’s STAR Market, an exercise that could raise new capital of around $4.7 billion, said the South China Morning Post.

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