HONG KONG/SHANGHAI (REUTERS) - Teetering China Evergrande Group abandoned a deal to sell a US$2.6 billion (S$3.5 billion) stake in its property services unit, sending its shares plunging on Thursday (Oct 21).
The setback comes just ahead of the expiry of a 30-day grace period for Evergrande to pay US$83.5 million in coupon payments for an offshore bond, at which time, if it cannot pay, China's most indebted developer would be considered in default.
Evergrande, in an exchange filing on Wednesday, said the grace periods for the payment of the interest on its US dollar-denominated bonds that had become due in September and October had not expired. It did not elaborate.
It added it will continue to negotiate for the renewal or extension of its borrowings or other alternative arrangements with its creditors.
In a small and rare respite, Evergrande secured an extension on one defaulted bond, financial provider REDD reported on Thursday. It won a more than three-month extension to the maturity of a US$260 million bond, issued by joint venture Jumbo Fortune Enterprises and guaranteed by Evergrande, beyond Oct 3 after agreeing to provide extra collateral, REDD reported, citing holders of the bond.
A source familiar with the matter said that Evergrande chairman Hui Ka Yan had agreed to pump in personal wealth into a Chinese residential project tied to the bond to ensure it gets completed, paving the way for bondholders to get their dues.
The bondholders agreed to the proposal to avoid a messy collapse of the developer or a drawn-out legal battle, the source told Reuters.
News of the extension came after Evergrande said on Wednesday it had scrapped a deal to sell a 50.1 per cent stake in Evergrande Property Services Group to Hopson Development Holdings as the smaller rival had not met the "prerequisite to make a general offer".
Both sides traded blame for the deal failure, with Hopson saying it does not accept "there is any substance whatsoever" to Evergrande's termination of the sales agreement, and it is exploring options to protect its legitimate interests.
In additional comments made in a statement on Thursday, Hopson said all major banks were positive towards this purchase, and a third-party financial adviser had verified the company had the financial resources needed to acquire the 50.1 per cent stake and for a general offer.
The deal is Evergrande's second to collapse amid its scramble to raise cash in recent weeks.
Two sources told Reuters last week the US$1.7 billion sale of its Hong Kong headquarters had failed amid buyer worries over Evergrande's financial situation.
Evergrande also said that, barring its sale of a stake worth US$1.5 billion in Chinese lender Shengjing Bank, it had made no material progress in selling other assets it has put on the block.
The scrapped sale of the stake in Evergrande's property services unit "has made it even more unlikely for it to pull a rabbit out of a hat at the last minute", said a lawyer representing some creditors, requesting anonymity as he was not authorised to speak to the media.
"Given where things are with the missed payments and the grace period running out soon, people are bracing for a hard default. We'll see how the company addresses this in its negotiations with creditors."
Trading in the Hong Kong-listed shares of China Evergrande, its property services unit and Hopson resumed on Thursday after a more than two-week suspension. Evergrande closed down 12.5 per cent and its property services unit dropped 8 per cent, while its electric vehicle arm eased 2 per cent. Shares of Hopson jumped 7.6 per cent.
Mainland China's CSI 300 real estate index gained 3.8 per cent as government officials came out in force in recent days to say the firm's problems will not spin out of control and trigger a broader financial crisis.
Worries that a cash crunch at Evergrande, whose US$300 billion in liabilities are equal to 2 per cent of China's gross domestic product (GDP), could cause economic contagion have seen swathes of other heavily indebted developers hit with credit rating downgrades, while some smaller ones have already defaulted.
Since the government started clamping down on corporate debt in 2017, many real estate developers have turned to off-balance-sheet vehicles to borrow money and skirt regulatory scrutiny, analysts and lawyers said.
Statements from other property developers on Thursday exacerbated investor concern of contagion.
Chinese Estates Holdings said it would book a loss of US$29 million in its current fiscal year from the sale of bonds issued by property developer Kaisa Group Holdings. Modern Land (China) Co said it had ceased to seek consent from investors to extend the maturity date of a dollar bond due on Oct 25. Its shares were suspended from trading on Thursday.
In comments reported by state media Xinhua and echoing words from the country's central bank late last week, Vice-Premier Liu He told a Beijing forum on Wednesday that the risks were controllable, and that reasonable capital demand from property firms was being met.
The chairman of China's securities regulator, Mr Yi Huiman, added at the same forum that the authorities would properly handle the default risks and look to curb excessive debt more broadly.
Chinese property developers have total outstanding debt of 33.5 trillion yuan (S$7 trillion), according to Nomura, equivalent to roughly a third of the country's GDP.
Evergrande, which has epitomised China's freewheeling era of borrowing and building, has been scrambling to raise funds to pay its many lenders and suppliers, amid expectations it is about to formally default on one of its international bonds.
In its Wednesday filing, Evergrande said it would continue to implement measures "to ease the liquidity issues" and would use best efforts to negotiate for the renewal or extension of its borrowings with its creditors.
"In view of the difficulties, challenges and uncertainties in improving its liquidity, there is no guarantee that the group will be able to meet its financial obligations under the relevant financing documents and other contracts," it said.
Creditors have so far said there has been no contact from Evergrande despite weeks of effort on their behalf. The developer will officially be in default if it does not make an already-overdue March 2022 bond coupon payment by Monday.
Mr Pan Gongsheng, head of China's foreign exchange regulator, added to a chorus of officials trying to soothe concerns, saying excessive tightening by financial institutions and markets on the property sector was being gradually corrected, financial magazine Yicai reported.
Those comments followed a speech by People's Bank of China (PBOC) governor Yi Gang, who said on Sunday that the world's second-largest economy is "doing well" but faces challenges such as default risks for certain firms due to "mismanagement".
A transcript of the comments released by the PBOC on Wednesday showed Mr Yi also saying that China will fully respect and protect the legal rights of Evergrande's creditors and asset owners, in line with "repayment priorities" laid out by China's laws.