Evergrande Moves Closer To The Abyss

Update: On Friday, Evergrande reportedly paid the $83.5 million bond interest referenced below

Evergrande was back in focus on Thursday.

Not that it ever drifted too far from market participants’ minds. It just needed to cede the spotlight for a few days so China’s other crises could garner their share of this week’s headlines.

Earlier this month, reports suggested Guangdong-based Hopson Development Holdings planned to acquire a 51% stake in Evergrande’s property-services unit. All associated shares were halted. Evergrande cited “a major transaction.” Hopson said the same, noting it was poised to announce an agreement “to acquire the shares of a company.”

Despite efforts by Guangdong officials to facilitate, including offers to help secure loans for Hopson to complete the transaction, the deal fell apart. In a filing, Evergrande said it had “reason to believe that the purchaser had not met the prerequisite to make a general offer for shares.” Hopson said it “regrets to announce that the vendor has failed to complete the sale.” Apparently, some Evergrande creditors weren’t enamored with the price.

Speaking of creditors, the news came just days before the end of a 30-day grace period on an $83.5 million dollar-bond interest payment Evergrande missed last month. Default now seems inevitable.

Evergrande needs cash badly and as the company helpfully reminded the market, the (now failed) disposal of the property services unit was “one of the measures being implemented to ease the liquidity issue.”

Commenting in a separate filing, Evergrande noted that it still had a few days under the grace periods for interest that came due last month, but conceded that with the exception of the Shengjing Bank share sale, “there has been no material progress” on asset sales.

The company is “using its best effort to negotiate for the renewal or extension of its borrowings or other alternative arrangements with its creditors.”

The shares obviously plunged as trading resumed (figure below).

Not that it matters. It’s a penny stock. Absent a cash infusion, the equity is worthless.

Insult to injury was the disclosure (in one of the two linked filings above) that real estate sales were down some 96% during the home-buying season.

“For the month of September and up till now, the Group achieved contracted sales of properties of 3.65 billion yuan including the amounts applied to set off debts due to suppliers and contractors,” the company said. From September 1 through October 8 of 2020, the figure was 142 billion yuan.

Obviously, this is hopeless. Evergrande is saddled with more than $300 billion in liabilities (figure below).

If the company can’t pay the $83.5 million coupon (mentioned above) when the grace period expires this weekend, failure may trigger cross-defaults.

On the bright side, Evergrande secured an extension on the Jumbo Fortune guarantee. That obligation came about as a result of a JV involving Hengda Real Estate, Evergrande’s principal onshore unit. Apparently, an agreement was reached when Evergrande said it would post extra collateral.

Other developers rallied Thursday on reassurances from Liu He and PBoC deputy Pan Gongsheng, who described risks to the real estate market as “controllable.” That’s the same word the PBoC used to describe Evergrande last week.

At least some analysts are comforted. The remarks from Liu and Pan, along with additional comments from an official at China Banking and Insurance Regulatory Commission, “reaffirmed our view that the ‘darkest hour’ for the sector is over,” someone at Sinolink Securities said.

As for Evergrande, the company now includes a bolded statement at the bottom of its filings. It reads: “Shareholders of the Company and other investors are reminded to consider the related risks and exercise caution when dealing in the securities of the Company.”


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