China Evergrande faces crisis of confidence among creditors

HONG KONG • China Evergrande Group is facing a crisis of confidence among creditors who lent the world's most-indebted developer more than US$120 billion (S$165 billion).

Long-simmering doubts about the health of China's biggest property company by revenue exploded to the fore on Thursday, following reports it had warned local government officials of a potential cash crunch that could threaten China's financial stability.

Investors dumped Evergrande's bonds yesterday, sending its yuan note due in 2023 down as much as 28 per cent to a record low. The company's Hong Kong-listed shares sank as much as 8.8 per cent to a near five-month low.

Subsidiaries Evergrande New Energy Vehicle Group and HengTen Networks Group tumbled 14 per cent and 20 per cent, respectively.

Evergrande said in a statement that rumours and documents circulating online were "fabricated" and "pure defamation", without commenting directly on whether it had warned officials of a potential cash crunch.

The developer, controlled by billionaire Hui Ka Yan, said it generated 400 billion yuan (S$81 billion) from project sales in the first eight months of the year and maintains healthy operations.

Evergrande won approval from Hong Kong's stock exchange to spin off its property management unit, a person familiar with the matter said yesterday. This paves the way for it to raise additional capital.

Worries that Evergrande may still face a liquidity shortfall stem from an agreement with some of its biggest strategic investors.

It gives them the right to demand their money back if the company fails to win approval for a backdoor listing on the Shenzhen Stock Exchange by Jan 31 next year. The repayment could amount to 130 billion yuan, or about 92 per cent of Evergrande's cash and cash equivalents.

At least one of the investors has signalled it would be unwilling to extend the deadline.

In another sign that creditors are growing increasingly concerned, at least five Chinese banks and two trust firms held emergency meetings on Thursday night to discuss their Evergrande exposure and access to collateral, sources familiar with the matter said.

At least two of the banks that convened meetings decided to bar Evergrande from drawing unused credit lines, according to the sources. The developer had credit lines of 503 billion yuan as at June 30, of which 302 billion yuan was unused.

"We think the situation may have prolonged negative impact," credit analysts Manjesh Verma and Stella Li of Citigroup wrote in a report. "It increases concerns among various investors and lenders and hence increases difficulty in funding access and refinancing."

Evergrande has long been viewed as a poster child for highly leveraged companies in China, where corporate debt swelled to a record 205 per cent of gross domestic product last year and has most likely climbed further this year, as businesses increased borrowing to tide themselves over during the pandemic.

Evergrande has tapped banks, shadow lenders and the bond market in recent years to expand far beyond the property industry into businesses ranging from electric cars to hospitals to theme parks - areas that often align with Chinese President Xi Jinping's policy priorities.

Though it is unclear why Evergrande has yet to win approval for its listing plan, some analysts have speculated it may relate to China's efforts to tame sky-high home prices and restrain fund raising by developers.

Regulators have since 2016 been using a wide range of policy levers to ban speculative home buyers, curb expensive land prices and restrict lending to residential builders.

Another unanswered question surrounding Evergrande is whether China's government would step in to support the developer if it struggles to repay creditors.

While policymakers have a long history of providing backstops for systemically important companies to maintain financial stability, the government has in recent years sought to instil more market discipline and reduce moral hazard.

As part of those efforts to rein in risk in the country's US$45 trillion financial system, the authorities have taken control of indebted conglomerates, including HNA Group, Anbang Insurance Group and Tomorrow Group.

Policymakers have also introduced new rules for financial holding companies, including Evergrande, that impose minimum capital requirements and other restrictions meant to reduce systemic risk.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 26, 2020, with the headline 'China Evergrande faces crisis of confidence among creditors'. Subscribe