Evergrande Restructuring Seen Unavoidable After Company Officially Called A Defaulter

Published 10 December 2021, 04:13 am EST

Chinese billionaire Hui Ka Yan is under new pressure to accelerate the restructuring of Evergrande’s whopping $305 billion in liabilities, after the embattled property developer was officially labeled a defaulter for the first time.

Fitch Ratings has downgraded Evergrande to “restricted default,” citing non-payment of two bond coupons originally due Nov 6. The agency said there was no announcement from the company or the trustee regarding the payments after a 30-day grace period had lapsed, and Evergrande didn’t respond to its request for information.

“We are therefore assuming they were not paid,” Fitch wrote in a note published online.

Analysts say an Evergrande default has long been anticipated, and the scenario has already been priced in its distressed-level bonds and free-falling shares. The Hong Kong-listed developer, which hasn’t publicly responded to the Fitch report, probably can’t maintain its silence for much longer.

“Previously, Evergrande could just drag this on and negotiate privately with creditors,” says Chuanyi Zhou, a credit analyst at Singapore-based Lucror Analytics. “If they officially default, then a debt restructuring is unavoidable.”

The company didn’t respond to an e-mailed request for comment. It announced on Monday that it had set up a risk management committee consisting of Hui himself and executives from conglomerates owned by Guangzhou city as well as the country’s bad-debt manager Cinda, to help “mitigating and eliminating the future risks of the group.”

Warut Proomboon, managing partner at Hong Kong-based research firm Bondcritic, says the long and arduous restructuring could start with selling of some non-core assets first. During Evergrande’s years of debt-fueled expansion, it has acquired businesses that have little to do with property development. The company still has interests in a football team and a mineral water company. In November, it sold its remaining stake in streaming service provider Hengten Networks for $273 million, after first cutting its stake in August to raise $418 million.

The Chinese government, on its part, has shown little interest in a direct bailout, but it wants to protect the interests of Chinese homebuyers. Officials in the province of Guangdong, where Evergrande is based, and other government departments are “guiding and urging” Evergrande to “proactively resume and complete housing construction for delivery to buyers,” the China Banking and Insurance Regulatory Commission wrote in an English-language statement last week.

Meanwhile, investors in the company’s dollar-denominated bonds are bracing for a heavy haircut, and they may only get 30% to 60% of their money back, analysts say. Hui, who now has a fortune of $9.1 billion that is largely based on Evergrande dividends received over the years, has been reported by state media to have funneled $1 billion of his personal wealth to help the company improve liquidity. Last month, the embattled billionaire also raised $343 million by selling some of his Evergrande stake for the first time since its initial public offering in 2009. The sale of personal assets is widely believed to come at the behest of government authorities, and has previously helped Evergrande meet offshore coupon payments right before deadline.

The billionaire could still be pushed to do the same even after the company officially enters restructuring. “The government pressure is ongoing,” Lucror Analytics’s Zhou says. “Currently, we don’t know where it draws the line and how the negotiations are progressing, but we can’t rule this out.”

By Yue Wang