Five years ago the speculation was that China Evergrande was readying a hostile takeover bid for Vanke, a rival Guangdong-based developer. Stock exchange filings showed that the property conglomerate had built up a 14% stake by snapping up Vanke stock on the open market.
But there was a problem: regulators did not seem to welcome the idea of the country’s most indebted developer taking over its biggest home provider. In fact, investors have yet to witness a hostile takeover bid actually go through successfully anywhere on the A-share market. And Evergrande eventually sold its Vanke stake to state-owned Shenzhen Metro at a hefty Rmb7.3 billion loss (see WiC370).
Vanke shareholders will be feeling they dodged the proverbial bullet. But in another twist, news broke this month that their company was one of the investors lining up to help the highly-leveraged Evergrande stay afloat.
On August 10, Hong Kong-listed Evergrande said it was in talks with third-party investors on the proposed sale of certain assets, including stakes in its listed carmaking and property management units. Caixin Weekly reported that Vanke and fellow Guangdong-based real estate developer Country Garden were both interested parties.
However, other media outlets soon reported that both suitors had subsequently walked away on disagreements over asset valuations. As of now, Evergrande is yet to clarify whether talks on the potential sales are still proceeding.
It certainly doesn’t want to lose control of its corporate crown jewels via a fire sale, although it is under massive pressure to realise some cash, given that its bonds have been trading at distressed levels amid a brutal liquidity crunch (see WiC550).
Its share price also fell to a new five-year low this week on news that founder Xu Jiayin had stepped down from the chairmanship of Hengda Real Estate, the group’s main property unit in China. Xu is said to have been replaced by a long-time company executive and Evergrande’s market value has plunged more than 60% this year to nearly $85 billion (albeit a substantial figure for a company so roundly regarded as being in a parlous financial state).
Xu’s previous plan was to float Hengda on the Shenzhen Stock Exchange to raise much-needed cash. Evergrande’s decision to offload the Vanke stake at a loss, some analysts suggested at the time, was partly aimed at appeasing Shenzhen regulators and clearing a path for the listing to be approved.
Now Xu’s departure from Hengda is stoking concerns that a more drastic restructuring is likely which would hurt creditors. Newsflow has been overwhelmingly negative since the end of last month, when Evergrande made a decision not to declare a special dividend less than two weeks after flagging that it would pay one to shareholders. The U-turn triggered a slew of credit downgrades by international rating agencies.
Yesterday the developer was summoned to a meeting with financial regulators including the central bank, which urged Evergrande to resolve its debt crisis and stop spreading untrue information.
According to the conglomerate’s most recent annual report, Evergrande’s liabilities had swelled to Rmb1.95 trillion by the end of 2020, of which 77% were due within 12 months. Bank loans and other borrowings accounted for about 81% of its Rmb335 billion in interest-bearing debt coming due this year.
Other commentators have been more sanguine about Evergrande’s prospects of survival, arguing that its collapse would be too much of a shock to the Chinese banking system. Bloomberg reported this week that at least three major state lenders including China Minsheng and Shanghai Pudong Development Bank have given the developer more time to repay maturing loans. However, it also said that the central government has pushed for a better plan to manage the impact of the company’s ongoing debt crisis.
For creditors the best scenario may be a partial nationalisation in a fashion similar to Vanke’s experience in 2017, when Shenzhen Metro became its largest shareholder. That said, local governments aren’t always ready to play the ‘white knight’ and come to the rescue. For instance in Hainan beleaguered creditors are still holding their breath on how they will be treated in the bailout plan for the island province’s indebted aviation conglomerate HNA Group.
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