Evergrande funds seized

There’s never a dull week here...

In October last year China Evergrande was close to securing a lifeline in the wake  of a worsening liquidity crunch. The Guangzhou-based developer agreed to sell a 50.1% stake in Evergrande Property Services – a major asset that seemed to be the simplest to offload – to cross-town rival Hopson Development for HK$20 billion ($2.6 billion).

The deal eventually blew up because of a disagreement over how the payment would be made. Hopson agreed to deposit the cash with the acquisition target pending due diligence to assess the property management firm’s payable accounts and receivables, which involve largely connected transactions  with its parent firm. Evergrande, however, wanted immediate payment to its own bank account.

As things turned out Hopson dodged a bullet. In its latest stock exchange filing in Hong Kong, Evergrande said about Rmb13.4 billion ($2 billion) of cash held by Evergrande Property Services had been seized by banks as security for third-party pledge guarantees. The seizure of the funds was only discovered by Hong Kong-listed Evergrande Property Services as it was preparing its annual report. At this point there are no details what those guarantees were for (and when the funds were seized).

Evergrande also announced on Tuesday that it and Evergrande Property Services wouldn’t be able to meet the deadline to publish their 2021 annual reports on time, i.e. before the end of March.

Once China’s biggest homebuilder, Evergrande has been struggling with more than $300 billion in liabilities at a time when the Chinese government has made efforts to deleverage the property sector. Having effectively defaulted on $22 billion worth of offshore debt in December last year, Evergrande has set up a ‘risk management committee’ with representatives from local governments and state-owned enterprises. They are expected to oversee a restructuring similar to that at troubled aviation group HNA (see WiC567). 

“With the broad support and understanding from the majority of creditors… we’ll  strive to release the preliminary restructuring proposal by the end of July,” Chen Yong, a member of the committee, told investors during a conference call this week.

The state-led restructuring of HNA has seen the aviation group’s crown jewel Hainan Airlines survive as a listed firm, although shareholders also needed to absorb material losses as control of the airline was transferred to energy conglomerate Fangda in December following a Rmb38 billion cash injection. In a new development last week, CBN, a newspaper, reported that the chairman of Hainan Airlines Bao Qifa had been taken away by police. His detention could be related to the case of HNA’s former chairman Chen Feng, who was also arrested by police last year for alleged ‘criminal offences’.

Evergrande Property Services went public in late 2020. Its market value has dived from a peak of nearly HK$200 billion to about HK$25 billion as of this week. The plunge is less brutal, however, when compared with that of the real estate firm’s electric carmaking unit. Evergrande New Energy (ENE) was worth as much as HK$750 billion in May last year. After hiring more than a dozen top car designers from foreign rivals, the company unveiled six models of electric vehicles under the Hengchi brand. But confidence in the Hong Kong-listed EV firm has also been dampened by the group’s debt crisis. ENE was hit with a trading suspension last week – just prior to that it was worth only HK$38 billion.

ENE’s prospects have never been of greater concern to Evergrande. The company’s representatives told investors this week that ENE is aiming to start mass production of its electric SUVs in June after getting approval to begin sales last week. It remains to be seen if yet another newcomer to China’s crowded EV market can ride to the rescue of its owner.

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