China targets Evergrande risks with $2.1b bank stake sale as latest bond payment falls due

Evergrande's troubles slammed global stock markets earlier this month. PHOTO: REUTERS

HONG KONG (BLOOMBERG, REUTERS) - China stepped in to buy a stake in a struggling regional bank from China Evergrande Group as it seeks to limit contagion in the financial sector from the embattled property developer.

Evergrande agreed to sell a 20 per cent stake in Shengjing Bank to the local Shenyang government for 10 billion yuan (S$2.1 billion), with the bank demanding that all proceeds go to settle debts with the lender, according to a statement to the Hong Kong stock exchange. In that case, the sale would do little to help Evergrande pay its massive debts to bond holders, homebuyers, suppliers and holders of onshore investment products.

Evergrnade made no public statements on an US$83.5 million (S$113 million) coupon that was due on Sept 23, and at least several holders had said they had not received the funds. The company now needs to pay a US$45.2 million coupon on Wednesday (Sept 29) for a dollar bond that matures in 2024.

Evergrande's silence on its offshore payment obligations has left global investors wondering if they will have to swallow large losses when a 30-day grace period ends for the last week and Wednesday's coupon payment deadlines.

"We are in the wait-and-see phase at the moment. The creditors are organising themselves and people are trying to figure out how this falling knife might be caught," said an adviser hired by one of the offshore Evergrande bondholders.

The bank stake sale illustrates how the authorities are taking steps to minimise fallout to the banking system from the worsening liquidity crisis at Evergrande as they try to avoid a bailout. At least 10 lenders told investors earlier this month that they have sufficient collateral for loans to the developer and that risks are under control. Hong Kong's central bank asked lenders to report their exposure to Evergrande Group, according to people familiar with the matter.

"With so many upcoming coupon payments towards year-end, selling non-core assets is the most efficient way for Evergrande to raise funds," said Mr Steven Leung, executive director of UOB Kay Hian. The central government is "watching very closely" on the proceeds from asset sales, he said.

The real estate conglomerate will sell about 1.75 billion non-publicly traded domestic shares in Shengjing Bank to Shenyang Shengjing Finance Investment Group Co at 5.7 yuan a piece, according to the statement. Evergrande's stake in the lender will drop to 14.57 per cent after the latest transaction, which requires relevant approvals.

The bank stake transaction underscores the mounting pressure on billionaire Hui Ka Yan to spin off and sell assets to pay down its US$305 billion mountain of debt. Evergrande's original 36 per cent stake in Shengjing Bank was among its most valuable financial assets, worth about US$2.8 billion.

In a sign of the worsening outlook for Evergrande, Fitch Ratings downgraded the developer's rating to C from CC on Wednesday.

But Evergrande's shares on Wednesday jumped 16.1 per cent to HK$3.10 on the stake sale plan. Stock of Evergrande's electrical vehicle unit soared 42.2 per cent to HK$3.30.

Its dollar bond due 2022 was indicated down a touch at 25.3 cents on the dollar while its 2025 note was unchanged at 23.5 cents.

Shengjing Bank posted a more than 60 per cent drop in first-half profit due to a decline in net interest income and higher impairment losses on assets.

"The company's liquidity issue has adversely affected Shengjing Bank in a material way," Evergrande said in the statement, adding that the introduction of the purchaser will help to stabilise the bank's operations.

A report in May from Caixin Media's WeNews said the China Banking and Insurance Regulatory Commission was examining more than 100 billion yuan of transactions between the two. Evergrande boosted its stake in Shengjing Bank in 2019, following a request from the authorities who wanted to recapitalise the lender, Bloomberg reported last year.

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