The company was once the country’s largest real estate firm and rocked markets late last year when it defaulted on dollar-bond payments after liquidity scares that began in 2020
The clock is ticking for the world’s most indebted developer, whose liquidity woes sparked a broader debt crisis in China’s property industry that has gone on to engulf more home builders, threaten banks and pose growing challenges for President Xi Jinping.
China Evergrande Group, once the country’s largest real estate firm, previously said it was on track to deliver a preliminary restructuring plan by the end of July. That leaves mere days for the builder with about $300bn (€293bn) of liabilities, just as a shake-up stirs fresh uncertainties.
The group said last Friday that Chief Executive Officer Xia Haijun was forced to resign amid a company probe into how 13.4 billion yuan (€2bn) of deposits were used as security for third parties to obtain bank loans, which some borrowers then failed to pay back. Chief Financial Officer Pan Darong was also made to step down.
Siu Shawn, an executive director, will take over as CEO. Mr Siu said that the firm has reached “basic consensus” on debt restructuring principles with multiple major global creditors, according to a report by Chinese daily newspaper 21st Century Business Herald.
The company rocked markets late last year when it defaulted on dollar-bond payments after liquidity scares that began in 2020. Contagion from that shock has dragged Chinese offshore junk notes, most of which come from property firms, deeper into distress. Meanwhile, Evergrande’s creditors have been left with little detailed indication of how much they may recover, in what would be one of the nation’s largest-ever debt restructurings.
As important as any clarity on that would be, though, there’s much more at stake. Money managers and policy makers are bound to see the Evergrande restructuring as an important precedent for dealing with ever-expanding defaults and restructurings in China’s real estate industry, which accounts for about a quarter of the world’s second biggest economy.
Evergrande’s restructuring proposal may shed light on the government’s treatment of offshore bondholders, and the level of authorities’ intervention, including in governance of the group “will also be informative about how policymakers consider handling the property crisis going forward”, according to Jean-Louis Nakamura, the chief investment officer for the Asia Pacific region at Lombard Odier. Key elements to watch out for would be the company’s asset disposal plans as well as terms on potential haircuts or maturity extensions.
The forced resignations of Xia and Pan look like extremely negative indicators
As risks build, the government has been ramping up support for the sector, just months away from a once-in-five-years Communist Party meeting where Mr Xi is expected to seek a third term. It was also reported China’s State Council has approved a plan to set up a fund to support developers, boosting the sector’s stocks and bonds.
“Evergrande’s change of CEO and CFO may not affect its announcement of a preliminary debt plan by the end of this month,” according to a Bloomberg Intelligence report.
Among potential motivating factors for meeting its previous timeline is that Evergrande has an electric vehicle unit that began taking pre-orders earlier this month for an electric sports utility vehicle, and the group would want to avoid any takeover of that unit as well as potentially being sued by creditors, they wrote.
But others take a less sanguine view on the significance of the shakeup for the preliminary restructuring plan.
“The forced resignations of Xia and Pan look like extremely negative indicators for Evergrande as it allegedly finalises a restructuring plan,” said Brock Silvers, chief investment officer at Hong Kong-based private equity firm Kaiyuan Capital. The company could miss its previously stated timeline for delivering the plan, Mr Silvers added.
What began as a downturn in China’s housing market sparked by a government crackdown on developers’ excessive borrowing and real estate speculation in 2020 has snowballed in recent weeks into unprecedented loan boycotts from angry homebuyers and suppliers. Liquidity crunches have prompted developers to stall many projects across the country and leave fees unpaid. In one example of how this is all cascading, a group of small businesses and suppliers that said they’d stop paying their own debts blamed Evergrande for leaving them out of pocket.
As angst in China’s real estate and credit markets spreads, Evergrande’s next steps will be scrutinised all the more. The builder urged patience and asked investors not to take aggressive action during a call in March. But unresolved issues have only grown since and the company also recently suffered its first rejection from local creditors to extend a bond payment.