USD Bond Coupon Repaid within Grace Period
Last Friday (October 22), Evergrande repaid the 83.5 million USD coupon of its offshore USD bond “EVERRE 8.250% 23MAR2022 CORP (USD)” on the last day of its grace period.
It is not exactly surprising as Hengda Real Estate (the real estate division of the Group) made a coupon repayment last Tuesday (October 19) for its onshore bond, which was settled in cash instead of negotiations off the clearing house like before. On Thursday (October 21), the markets circulated news that Evergrande successfully extended its matured, but unpaid, private USD bond issued by Jumbo Fortune for 3 months.
The above actions showed that Evergrande still wants to avoid defaulting on bonds in the near-term, which could allow creditors to claim against and liquidate its offshore and onshore assets. Next, the Group may pay the remaining coupons on the last day of each bond's grace period. But is it really good news for bondholders?
The Game Theory of Asset Sale
It seems like good news for holders of the bond due in March 2022 as they have received at least one coupon and the bond price was boosted slightly. Moreover, Evergrande may be able to show that its cash balance is not completely exhausted, and there is no need to use funds from the sale of major assets (such as Evergrande Property Services) to pay interest.
However, we mentioned earlier that the most important assets of the Group are its equity ownership of several listed companies. If Evergrande continues to liquidate them, apart from raising concern on selling assets at a low price, market observers may also question whether the funds obtained will be wired back onshore for home construction or other purposes, which will greatly affect the bonds’ recovery value.
Therefore, at this point it is unclear whether the bond coupon payment is positive for bondholders, because after avoiding an immediate bond default, Evergrande will have more time to plan for further asset sales.
On the afternoon of October 8, a creditors meeting was held by several offshore creditors (with total holdings of approximately US$2.5 billion in offshore bonds), instead of Evergrande. Two representatives from Kirkland & Ellis LLP and Moelis & Co (the appointed financial advisers) pointed out that they are trying to prevent Evergrande from liquidating offshore assets and protect the interests of offshore creditors. However, as of the day of the meeting, they had made several futile requests for a dialogue with Evergrande.
Despite terminating the deal to divest stakes in Evergrande Property Services to Hopson Development, Evergrande has been selling shares in its listed companies. This includes the sale of 10% of Calxon Group’s shares over the past month, for a total amount of about 500 million yuan.
On September 29, the group announced that it would transfer about 20% of the equity of Shengjing Bank to a state-owned enterprise in Shenyang, cashing out nearly 10 billion yuan. However, all the funds acquired from the transaction will only be used to repay related liabilities due to Shengjing Bank. Such preferential treatment and payment is apparently detrimental to other creditors. Therefore, it is understandable if a USD bondholder wishes to prevent similar events from happening again.
After Evergrande and Hopson Development’s shares resumed trading last week, the two companies accused each other of failing to perform contract obligations. However, given that Hopson Development said they are still proceeding to complete the acquisition with legal procedures, in addition to the 40 billion HKD valuation of Evergrande Property Services described in the agreement (about 28% discount to market price before the trading halt), Evergrande is likely to be the one proposing a termination of transaction.
At this juncture, we do not know if it is because the management believes that they can find a better buyer, or if it suddenly does not want to sell assets anymore. Regardless, the market will pay close attention to Evergrande's asset sales moving forward.
Discontinued Property Sales and 10-Year Transformation Plan
According to the latest announcements, Evergrande’s property sales from September 1 to October 20 was only 3.65 billion yuan (including the amounts applied to set off debts due to suppliers). We estimate the magnitude of YoY decline was over 95%, signaling that they have already halted most of the sales activities.
Last Friday (October 22), Evergrande held an internal meeting, and Chairman Hui Ka Yan proposed a plan to transform the Group’s business from real estate to new energy vehicles. In addition to not growing Evergrande’s land bank, he also hopes to lower the scale of property sales to 200 billion yuan (2020: 723.2 billion yuan) within 10 years.
This would mean that the Group should focus on Evergrande New Energy Vehicle in the future, reflecting that this subsidiary may not be included in the asset sale plan. However, if the group defaults on bonds, its asset including the holdings in Evergrande New Energy Vehicle will be claimed against or be liquidated, which will lead to a failure of the transformation plan.
Therefore, we believe that the key to survive from the short-term default risk is still the recovery of sales cash flows, and the ten-year plan is meaningless at this point. As Hui Ka Yan pointed out: only with the resumption of sales and operations, then only can homes be delivered to owners, followed by payments of wealth products, and then the repayment of the debts due to financial institutions.
Recently, there has been news that the construction work for several Evergrande’s projects are gradually resuming. We believe this will be an important step for its redemption.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in EVERRE 7.500% 28Jun2023 Corp (USD) and EVERRE 8.250% 23Mar2022 Corp (USD), and the analyst who produced this report holds a NIL position in the abovementioned securities.
