Debt-laden China Evergrande ends Shenzhen listing plan, strikes investor deals

Evergrande recently raised US$555 million (S$746.9 billion) in a secondary share sale. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - China Evergrande Group scrapped plans for a backdoor listing in China and struck deals with more investors to avoid a wave of repayments, capping a four-year saga that had recently raised fears of cash crunch at the world's most indebted developer.

While it was widely anticipated that Evergrande would fail to win regulatory approval for its listing, the deal's demise underscored China's focus on containing risks posed by fast-growing real estate and financial firms. Evergrande's announcement came less than a week after the shock suspension of Ant Group's blockbuster initial public offering.

The fate of the backdoor listing was a key concern for Evergrande earlier this year because it had promised to repay strategic investors as much as 130 billion yuan (S$26.4 billion) if regulators didn't approve the transaction by Jan 31. But after worries of a liquidity squeeze caused Evergrande's shares and bonds to tumble at the end of September, the company reached agreements with investors to avoid 86.3 billion yuan of repayments.

Evergrande said on Sunday (Nov 8) it had completed negotiations with investors holding a further 35.7 billion yuan, without disclosing details of the agreements. The announcement suggests Evergrande's short-term liquidity challenges will ease, but there are still lingering questions over what promises the company made to holdouts.

"There may be a commitment to a guaranteed return for these strategic investors," Chuanyi Zhou, a credit analyst at Lucror Analytics in Singapore, wrote in a report.

Evergrande shares rose 2.3 per cent at 1.06pm in Hong Kong, after swinging between gains and losses in the morning session. The company's 8.25 per cent dollar bond due 2022 fell 0.2 cent to 87.7 cents, according to prices compiled by Bloomberg. Shenzhen Special Economic Zone, which has been halted during the four years the plan has been in limbo, rose 6.4 per cent as trading resumed on Monday.

Bloomberg Intelligence analysts Kristy Hung and Patrick Wong said: "Evergrande's failure to list in China means that to cut net debt to equity to 100 per cent it may need to rely on equity placements in Hong Kong, asset sales and more price cuts. While rolling over another 36 billion yuan of strategic investments could ease near-term cash flow pressure, risks to earnings persist from potential dilutions, falling margins and gloomy medium-term growth."

Under the backdoor listing plan, Evergrande would have sold its Hengda Real Estate unit, which owns most of its real estate assets in China, to Shenzhen Special Economic Zone Real Estate & Properties Group, a Shenzhen-listed shell company.

As part of the planned listing, Evergrande in 2017 introduced 130 billion yuan of strategic investment to Hengda, and promised investors they would be repaid in cash or other forms if the listing wasn't completed by January 2021. The investments boosted Evergrande's valuation, but risked a cash crunch should the listing be delayed or fail.

As the deadline neared, the developer warned Chinese officials it faced a potential default that would lead to "cross defaults" in its borrowings, according to an Aug. 24 letter to the Guangdong government seen by Bloomberg. Evergrande said the letter was a fabrication.

The developer has since raised cash through asset sales and is seeking approval for a Hong Kong listing of its property management services unit, easing concern about its ability to service its near-term debt. However, doubts remain about the company's long-term financial strength.

"In the longer term, Evergrande's credit outlook depends on whether it can cut debt faster than it matures and adjust its business to a more sustainable level," said Hao Yang, an analyst at Nanjing Securities.

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