BEIJING (BLOOMBERG) - The Chinese authorities are considering a proposal to dismantle China Evergrande Group by selling the bulk of its assets, according to people familiar with the matter.
The developer has more than US$300 billion (S$405 billion) of total liabilities, including more than US$19 billion of offshore bonds.
The restructuring proposal, submitted to Beijing by officials in Evergrande’s home province of Guangdong, calls for the developer to sell most assets except for its separately listed property management and electric vehicle units, the people said. A group led by China Cinda Asset Management, a state-owned bad-debt manager and major Evergrande creditor, would take over any unsold property assets, the people said.
If approved by senior officials in Beijing, the plan would mark the biggest step yet by President Xi Jinping’s government to prevent a disorderly collapse of the world’s most indebted developer from roiling China’s financial markets and economy before a closely watched Communist Party leadership transition later this year.
Proceeds from the asset sales would be used to repay creditors, although it remains unclear to what degree banks and bond holders would be forced to accept haircuts on their claims. Senior Chinese regulators have repeatedly said in public remarks that debt risks at Evergrande and other distressed property companies should be dealt with in a “market-oriented way”.
Evergrande’s property management and electric vehicle ventures, with a combined market value of almost US$9 billion, would initially be kept intact under the proposal but could be sold at a later date, the people said. A custodian account would be set up for these assets to offer some protection to offshore investors, one of the people said.
If Beijing signs off on the plan, it would kick off an unwinding of the debt-laden developer that was started 25 years ago by billionaire chairman Hui Ka Yan. It would also likely set off a lengthy battle over who gets paid from what remains.
The size of haircuts ultimately borne by creditors will be closely scrutinised by investors for clues about how Mr Xi plans to balance sometimes competing goals of reducing moral hazard in China’s financial system and maintaining economic stability. The Chinese leader, who is widely expected to secure a precedent-defying third term this year - and potentially extend his rule even longer - has also been seeking to rein in the billionaire class as part of his “common prosperity” campaign to reduce a yawning wealth gap.
While Mr Xi has surprised many investors with his commitment to curbing financial excesses in the real estate sector, the government has recently dialled back its crackdown amid mounting worries about industrywide contagion. The International Monetary Fund cautioned on Tuesday (Jan 25) that China’s housing slowdown is among the risks to global economic growth.
Cinda, in response to questions from Bloomberg, said it has “no relevant information to disclose at the moment”. Officials at Evergrande and the Guangdong government did not immediately reply to requests for comment. Financial information provider REDD reported on some aspects of the Guangdong proposal last week, saying officials may announce a framework before March 5.
Evergrande said in a statement on Wednesday that it plans to come up with a preliminary restructuring proposal in the next six months. It earlier urged offshore bond holders not to adopt aggressive legal action over repayments, after an ad hoc group of holders said the company failed to substantively engage with it over restructuring efforts. Evergrande has started the process of identifying bond holders and plans to hire additional financial and legal advisers.
The developer was labeled a defaulter for the first time in December after it missed payments on several bonds. Evergrande established a seven-member risk management committee at the time to “actively engage” with creditors.
The panel includes senior managers from Cinda and Guangdong province’s state-owned enterprises. Evergrande has also appointed the chairman of China Cinda (HK) Holdings as a non-executive director. On Wednesday, China Business News reported that regulators held a recent meeting with several asset-management companies to discuss their participation in property developers’ asset disposals.
Evergrande’s cash crunch has become a focus for global investors, concerned that a collapse might spark financial contagion and curb growth in the world’s second-largest economy, which depends on the housing market for about a quarter of gross domestic product.
The developer has seen its bonds trade at deep discounts to par as investors brace for what could be one of China’s largest-ever restructurings. Evergrande’s dollar note due in 2025 was indicated at about 16 cents on Thursday. Its stock has plunged almost 90 per cent since the beginning of 2021.
While the Chinese authorities have eased their real estate crackdown in recent weeks, they have made it clear they have no appetite for an Evergrande rescue. The central bank in October blamed the developer’s woes on its “blind expansion and diversification” and failure to operate prudently amid changing market conditions.
Evergrande has made little progress on asset sales in recent months, even after Mr Hui put stakes in once-prized businesses such as a bottled-water unit on the block. The developer in October scrapped talks to offload a controlling stake in its property management business, which could have raised about US$2.6 billion. Plans to sell its Hong Kong headquarters have also stalled.
The electric car and services units are now worth more than Evergrande, whose market value has plunged to less than US$3 billion. China Evergrande New Energy Vehicle Group, which has also tumbled over the past year, has yet to mass produce any cars. Evergrande Property Services Group manages and services apartments built by Evergrande and other developers.
Evergrande has been prioritising payments to migrant workers and suppliers as regulators urge the company to head off any risk of social unrest.
It is also under pressure to finish homes for 1.6 million buyers who have already put down deposits, and must repay retail investors who bought some of its wealth products used to finance construction.