Evergrande: What does China’s biggest debt restructuring look like?

Chinese real estate group Evergrande has shown hope on Wednesday by announcing that it has “resolved” interest payments on onshore bonds due this week a few days after the group’s debt crisis spilled over into the global market.

But the world’s most indebted developers haven’t said when it will be. Make a payment And most importantly, we couldn’t shed any more light on the important deadlines faced by international bonds on Thursday.

This development has only increased uncertainty about the Evergrande Group’s default outlook, an event that could lead to the greatest debt restructuring in China’s history.

Evergrande’s restructuring, which had been expected for years due to huge debt, will still be a remarkable turnaround for the company whose rapid growth was its chair and founder. Xu Jiayin The wealthiest man in China by 2017.

It is also politically sensitive given that tens of thousands of civilians hold company investments, buy homes and invest in related businesses.

What does Evergrande own and rent?

As of the end of June, Evergrande’s total balance sheet was approximately RMB 2.38 billion ($ 368 billion). Its business primarily involves purchasing land from local governments, developing it and selling residential apartments to customers before construction is complete. The company uses these sales proceeds and debts to finance further land purchases.

Evergrande has 778 projects underway in 223 Chinese cities, investing in businesses ranging from electric vehicle manufacturers to bottled water companies.

China’s 214 million square meters of land was originally worth RMB457 billion, more than two-thirds of the first and second tier cities. The company’s cash was RMB87 billion as of the end of June.

Like its assets, Evergrande’s RMB 19.7 trillion ($ 305 billion) debt is overwhelmingly included in China. It borrows money from land banks and bondholders and guarantees several wealth management products. In the offshore market, we have a debt balance of approximately $ 20 billion.

It also borrows money from its many suppliers and contractors Take legal action To developers over unpaid invoices.

Evergrande did not immediately respond to the request for comment. However, on September 13th, it was stated that “recent online statements about Evergrande’s bankruptcy and restructuring are not entirely true.” This month, Hui appeared on social media and signed a pledge to carry out the project.

What will the restructuring look like?

The restructuring process is probably aimed at avoiding liquidation and continuing core real estate development operations. Sale of non-core assets To minimize creditor losses.

Rating agency S & P is an evergrande group The default was “likely”He plans to pay interest on dollar bonds on Thursday, saying Beijing will seek “an orderly debt restructuring that maximizes the value of real assets.”

Ron Thompson, a restructuring expert at Alvarez & Marsal, said creditors committees are usually formed, where various creditors make decisions through a majority vote.

China Fortune Land Development, Hebei-based developer Default in FebruaryFor example, there is a creditors committee run by Heian, China’s largest insurance company. Recorded a $ 3.2 billion hit From the missed payment.

When a creditor initiates bankruptcy proceedings against Evergrande, it must first convince the court to accept the order. The company then has a six-month grace period to develop a restructuring plan under Chinese law, and the deadline can be extended by another three months.

But a serious question facing Beijing and Evergrande creditors is whether there is enough time to “coordinate” pre-packaged restructuring, Allen & Cognos in Hong Kong. Restructuring and recovery group partner Ian Chapman said.

The ability to continue a construction project is important not only for Evergrande’s survival, but also for homebuyers who are prepaid for apartments that have not yet been built.

Wei He of Gavekal Dragonomics suggested that completing these projects was Beijing’s top priority. “The easiest way to do that is for another developer to take over the project and complete the construction and use the proceeds from the further apartment sale to cover the debt,” he said. ..

How is the government involved?

When a retail investor landed at Evergrande’s headquarters in Shenzhen last week Request a refund for their investment, Their angry eye-catching images spilled over to Chinese social media.

The central government is eager to limit further social turmoil, but S & P did not expect direct support for Evergrande “unless the stability of the system is at stake.” bottom.Rating agencies intervene in the authorities motionLaunched last year, to reduce the debt of large developers.

Alvarez & Marsal’s Thompson suggested that Beijing’s focus in such situations was “individual first.”

Local governments are closely associated with the real estate developers they rely on. Income from land sale Not only economic activity. Evergrande executives in Wealth Management told the Financial Times that the company had submitted a restructuring plan to the central government since February, but it was not accepted.

Evergrande executives say one of the “last resorts” is for local governments and large state-owned developers to take over the group’s operations “regionally.”

Restructuring expert Jack Rodman, who has worked with Chinese asset managers as an auditor, agreed that the regional approach is the “most likely scenario.”

Who will lose?

The international bond market is pricing serious losses on Evergrande debt, with bonds maturing next year trading for less than $ 1.30.

But the loss for investors depends on the price they buy.A UBS note sent to the client last week explains why I kept holding the funds Bonds suggested that Evergrande’s debt was “trading below typical historical recovery values.”

In the past, offshore bondholders Peking University Founder Group.. An S & P analysis of the court restructuring of nearly 50 defaulters in China showed that the average cash recovery rate for unsecured debtors was 23.7 percent.

The deeper question is what is meant by restructuring in the spotlight for consumer confidence in the economy, where real estate accounts for nearly 28% of its activity, directly and indirectly.

“Real estate tightening needs to be eased,” said Evergrande executives.

Evergrande: What does China’s biggest debt restructuring look like?

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