Big, but failed

Evergrande on the verge of state-led restructuring


Soon to be nationalised?

The Evergrande debacle has been a drama of many acts as the company stumbles from one crisis to the next, weighed down by more than $300 billion of debt. But are we reaching the final scenes in the story of its decline?

The last few weeks have seen at least three separate scrambles to make last-minute payments on Evergrande’s offshore bonds. But its announcement last Friday that it would “actively engage with offshore creditors to formulate a viable restructuring plan” signalled that a default on its obligations was imminent, HSBC’s Asia Credit Research team warned last week.

It also meant an anxious weekend for bondholders waiting for just over $82 million in much-delayed coupon payments from Evergrande on Monday. The news from some of them – that nothing had arrived – fed a fearful market in Hong Kong, where the company’s shares fell to record lows. One of the major concerns from investors is that repayment failures will trigger defaults in Evergrande’s other liabilities, bringing down the final curtain on the embattled developer.

The situation had improved slightly by Monday evening, after the company announced that it will set up a “risk management committee” to deal with the operational and financial challenges it is facing.

Evergrande’s chairman and controlling shareholder Xu Jiayin will chair the new committee, but five of the other six positions have been reserved for representatives of SOEs under the local governments of Guangdong and the city of Guangzhou (including developer Yuexiu and investment bank Guosen) as well as Cinda, one of the four major ‘bad banks’ that specialises in mopping up distressed assets.

The implication is that Evergrande’s imminent restructuring is likely to mirror the way the Hainan government has taken the lead in dealing with HNA.

The debt-ridden aviation conglomerate announced this week it has transferred the control of its core businesses including the Shanghai-listed Hainan Airlines (which is worth Rmb65 billion as of this week) to Fangda. The private sector energy conglomerate was picked by the Hainan government in September as HNA’s white knight after proposing to inject Rmb38 billion into HNA (see WiC556).

Similarly, the Guangdong government could look for new funding, possibly from property SOEs in Guangdong according to the Financial Times, to stave off the complete collapse of one of the biggest firms in the province. But Evergrande’s existing shareholders would be foolish to count on the same kind of rescue themselves, Chen Long, an analyst at Plenum in Beijing, told the FT. “After that, Evergrande is done. Original shareholders, including Xu Jiayin will be wiped out,” Chen predicted (see WiC558 for our five scenarios for how the Evergrande restructuring might pan out based on precedents).

The most pressing concern for financial regulators is how to avoid systemic risks posed by an industry where many firms are on the brink of going under. Trading in Kaisa, for instance, was suspended again in Hong Kong this week after speculation spread over its ability to meet its repayment schedule. Sunshine 100, another developer listed in Hong Kong, also missed a repayment deadline on Sunday.

The People’s Bank of China put out a statement of its own last Friday reiterating that the risks from Evergrande’s debt crisis could be contained and blaming the developer’s “poor management” and “reckless expansion” for the problems it faces.

Yet there’s little doubt that Beijing could do without the deadening effect of Evergrande’s demise, especially at a time when GDP growth is showing signs of slowing to less than 5% – well below pre-pandemic rates. Hence the decision to cut banking reserve requirement ratios this week – freeing up more than Rmb1.2 trillion ($188.34 billion) of liquidity – as well as the focus by the domestic media on how the Politburo has agreed to “support the commercial housing market and better meet the reasonable housing needs of buyers”.

The more supportive sentiment is going to come too late to save Evergrande’s Xu. But for some of the other strugglers in the sector, the change in tone might buy them a little more time to recover.

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