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Jun 05, 2023

China Evergrande’s Rise, Massive Default and Debt Restructuring

One of China’s largest-ever debt restructurings is starting to take shape. China Evergrande Group was declared to be in default in late 2021, the highest-profile casualty of a broader crisis in the

One of China’s largest-ever debt restructurings is starting to take shape. China Evergrande Group was declared to be in default in late 2021, the highest-profile casualty of a broader crisis in the country’s property development industry. The government has stepped in to oversee the rescue, quelling fears of a disorderly collapse that could have jolted the world economy. But Evergrande bondholders are still wondering how much of their money they’ll see after the dust settles.

1. How did we get here?

Evergrande, founded in 1996, relied on heavy borrowing to fuel its growth. It became the largest dollar-debt borrower among its peers and for a time the country’s biggest developer by contracted sales. On its website, it says it owns more than 1,300 projects in 280 cities. Over the years the company also branched out into areas ranging from electric vehicles to a local sports team. It had a liquidity scare in 2020, and outlined a plan to roughly halve its $100 billion debt pile by mid-2023. But China’s housing market began to slow as regulators cracked down on excessive borrowing. Further funding problems sent the company’s stock and bonds tumbling and, after late payments on some dollar bonds, it missed a December 2021 deadline to pay two dollar-bond coupons. A “risk management committee” dominated by state officials was quickly set up to stave off a complete collapse and guide the firm’s restructuring.

2. What’s the plan?

A restructuring plan released in March proposes that Evergrande bond investors receive new notes maturing in 10 to 12 years, or a combination of new debt and instruments tied to the shares of its property-services unit, its EV division or the builder itself. Meanwhile, Evergrande prepared fresh information for creditors, including a recovery analysis done by Deloitte, according to Evergrande’s lawyer. He said average recovery for Evergrande notes would be would be 22.5%, versus 3.4% if the firm gets liquidated.

3. Do bondholders have any bargaining power?

Some overseas investors saw little use in pressing their case in Chinese courts, given the government’s heavy involvement. Early on, a group of them criticized what they called the company’s lack of engagement. However, bondholders secured more influence in June 2022 when a creditor filed a lawsuit to wind-up Evergrande in Hong Kong. That court pressed the company to show concrete proof of progress in the debt negotiations in order to avoid liquidations. After months of delay, Evergrande received court approval to hold votes on its offshore-debt restructuring plan in late August 2023, in Hong Kong. Hearings to sign off on the results were set for two weeks later.

4. How bad are Evergrande’s finances?

Long-delayed results released in July offered a jaw-dropping clue. Evergrande announced $81 billion of combined losses for 2021 and 2022, the company’s first two full-year losses since its 2009 listing. Its revenue plunged by half in 2021 to about 250 billion yuan ($35 billion), and fell again last year to 230 billion yuan. The developers’ debt pile meanwhile has soared, with total liabilities reaching 2.58 trillion yuan at the end of 2021, or almost $360 billion, before falling slightly to 2.44 trillion yuan as of December last year. The firm’s tight cash buffer of 4.3 billion yuan as of end-2022, compared with short-term debt of about 587 billion yuan, could explain its imminent need for a debt restructuring plan, according to Bloomberg Intelligence analysts. Meanwhile, Evergrande’s contracted-sales ranking has rebounded, to No. 18 out of some 200 companies by mid-year. It’s unclear, though, how much of that bounce came from sales of discounted properties used to repay overdue loans and wealth-management investment products known as WMPs.

5. Are the figures reliable?

Prism, a small accounting firm named as Evergrande’s auditor in January, added a disclaimer of opinion to Evergrande’s accounts, saying it’s unable to obtain sufficient and appropriate audit evidence. Still, the results give offshore bondholders something to chew on before they vote on the company’s debt restructuring proposal.

6. How’s business doing?

Activity on Evergrande’s construction sites appeared to be returning to normal this year. Chairman Hui Ka Yan said in a July internal meeting that some projects were “close to the finish line” for delivery, according to a local media report. Unfinished projects are mainly located in inland cities like Kunming or Guiyang, it said. The developer remains under legal pressure, facing 1,601 lawsuits involving 383 billion yuan related to its mainland property unit as of May. Meanwhile, the stock has been suspended since March 2022. Before it can resume trading, Hong Kong’s stock exchange has said the developer needs to have the winding-up petition filed against it withdrawn or dismissed, among other steps.

7. Could the government still bail out Evergrande?

The prospect was long seen as unlikely and faded further when then-People’s Bank of China Governor Yi Gang said the company would be dealt with in a market-oriented way. A full bailout could tacitly condone the type of reckless borrowing that landed one-time high-flyers like Anbang Group Holdings Co. and HNA Group Co. in trouble as well. On the other hand, allowing a behemoth like Evergrande to totally collapse would cause pain for many other companies as well as would-be homeowners. The builder has been told by Chinese regulators to prioritize payments to migrant workers and suppliers.

8. What about the rest of China’s property sector?

It’s mired in a record slowdown, stifling a recovery this year in the world’s second-largest economy. After a 28% slump in nationwide residential sales in 2022, a rebound early this year faltered in June. Home values are falling again, and property investment contracted at a steeper pace in the first half of the year. The credit crisis among developers has also shown no sign of easing, with more developers defaulting or suspending repayments this year. The ruling Communist Party’s top decision-making body, the Politburo, signaled more support for the real estate sector at a mid-year meeting. Its language on property — which accounts for up to 20% of GDP once related sectors are added in — was notably softer than in previous meetings, and omitted President Xi Jinping’s signature slogan that “houses are for living, not for speculation” for the first time in years. Chinese authorities were said in July to be considering easing home-buying restrictions in the nation’s biggest cities, which may include scrapping mortgage rules that require higher down payments and have more restrictive borrowing limits for first-time homebuyers.

9. Who is Hui Ka Yan?

When Xi marked the centenary in 2021 of the Communist Party’s founding with a speech proclaiming his nation’s unstoppable rise, there overlooking the festivities in Tiananmen Square was Evergrande founder Hui. Born into poverty as the son of a wood cutter, Hui has been a party member for more than three decades and has invested in areas endorsed by the top leadership, such as EVs and traditional Chinese medicine. He’s been a prominent philanthropist — though his net worth has taken a beating — and Evergrande’s purchase of local soccer team Guangzhou F.C. indicates he shared Xi’s passion for the sport. In the end, those political ties weren’t enough to avert a default. Hui was said to have requested personal leave from the Chinese People’s Political Consultative Conference in 2022 as Evergrande worked to defuse operational risks.

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