After a series of default and selloff in the Chinese real estate sector, China Evergrande is back in the headlines. On the evening of March 22, the Group held its second offshore investor call, after the previous one on January 26 (Reference article: “What is Happening after Evergrande’s Investor Call?”)
Evergrande was represented by Executive Director Siu Shawn, Non-Executive Director Liang Senlin, and Member of Risk Management Committee Chen Yong in the investor call.
The Group provided more information and even responded to some of investors’ concerns this time, as compared to the last one. We organized the call content into three categories so investors can take away the key messages with ease.
Latest Operating Status
- The Group is still emphasizing the importance of resuming constructions and delivering homes for its real estate business. As of end-Feb, the resumption rate has exceeded 80% (excluding those in winter break), and more than 70% construction partners have confirmed to continue working with the Group.
- For Evergrande’s New Energy Vehicle, the first SUV model ‘Hengchi 5’ was approved by Ministry of Industry and Information Technology recently, and it has obtained the right for sale. The company is now preparing for mass production as well as sales and marketing. It is expected to complete the manufacturing process on production line around end June this year. (It is worth noting that Evergrande’s Chairman Hui Ka Yan did not join the investor call, but he attended a Hengchi 5 production conference at the same time and announced that the company will strive in the next 3 months to mass produce Hengchi 5 by June 22).
- Looking at Evergrande’s Property Services, according to their announcement on the previous day, the company discovered that approximately 13.4 billion yuan deposits, as security for third party pledge guarantees, were seized by the banks. During the investor call, Siu Shawn said Evergrande Property Services and China Evergrande will establish an independent investigation committee respectively to investigate the financial guarantees.
- Both China Evergrande, Evergrande Property Services and Evergrande New Energy Vehicle will postpone the publication of last year’s audited results. Siu Shawn said the Group will release their annual results as early as possible to lift the trading halt.
Commentary: The capital condition of Evergrande Property Services should be the most important among abovementioned points. At the end of last June, Evergrande Property Services owned 14.0 billion yuan cash and cash equivalents. In other words, 96% of the cash were pledged as guarantees, which suggests a possibility of illegal use of funds. It is expected that the valuation of Evergrande Property Services will suffer from a huge discount, and it may even bring negative impact to the entire property management sector.
Besides, according to the rules of HKEX, a listed company is subjected to trading halt if its annual results (regardless of audited or not) is not published by March 31. Many companies have announced that they can only publish unaudited results within the stated deadline, given the prolonged auditing process because of the pandemic. However, Evergrande did not mention whether they could publish unaudited results on time.
Offshore Debt Status
- Based on the preliminary projection, the indebted developer has 22.7 billion USD in offshore direct debts. This includes 14.2 billion USD of bonds issued by China Evergrande (EVERRE), 5.2 billion USD of bonds guaranteed by Tianji Holdings (TIANHL) and 3.3 billion USD of other offshore debts such as project financing and private borrowings.
- However, other than the debts listed above, China Evergrande also provided guarantees for some onshore borrowings, as well as the repurchase deed of equity financing. The Group did not disclose the amount of these obligations.
- For the Yuen Long Wo Shang Wai project and China Evergrande Centre, the Group said both have been used as collaterals. The Wo Shang Wai project was pledged to obtain a loan of 520 million USD from Oaktree Capital, and it was taken over because the Group failed to repay the debt on time. The China Evergrande Centre was used as a collateral of a syndicated loan. The Group is planning to sell these two assets to repay the guaranteed creditors, with the residual value being prioritized for offshore operations.
Commentary: The offshore debt amount disclosed by Evergrande is similar to our estimation. But one should note that the Group only included the more transparent ‘direct debts’, and excluded the guarantees for onshore companies and other ‘hidden debt into equity’ such as strategic investment. This hints immense risks, as the market is unclear of the amount and repayment priority of these obligations.
In addition, we can conclude from the above that Evergrande has already pledged many offshore projects for financing. Therefore, the expected residual value is quite limited even if the Group could find appropriate buyers.
Restructuring Progress
- The Group targets to roll out its restructuring plan before the end of July. It has contacted 89 offshore creditor institutions, with most agreeing the Group to enter restructuring process.
- Evergrande Property Services and Evergrande New Energy Vehicle are actively seeking strategic investors in hope to restore the companies’ valuations, and provide support for the offshore debt restructuring.
- The Group is working with some trust companies and adopting an ‘equity transfer + trusteeship operation’. The proceeds will be used for onshore home deliveries.
Commentary: Evergrande has stated that it has no plans to sell the equity ownership in two of its major subsidiaries to repay debts. Given the huge size of Evergrande’s existing debt, the direct sale of assets may be more detrimental to bondholders. Therefore, we believe the company made a right move.
Meanwhile, there are trust companies who decided to acquire the equity interest of certain Evergrande’s projects recently, such as Everbright Trust and Minmetals Trust. It was also reported that CITIC Trust, creditor of a 3.25 billion yuan trust loan, is planning to introduce state-owned Guangzhou City Construction Investment Group as a guarantor. Evergrande is allowed to return the land used as a collateral to the Government, and Guangzhou City Construction Investment will repay the principal to CITIC Trust in two years with the cash refund. However, it should not significantly affect offshore creditors as we think the recovery value of onshore assets is extremely low and the cash recovered is mainly used for home deliveries.
Judging from the current situation, Evergrande will not repay the EVERRE 8.250% 23Mar2022 Corp (USD) due today. We will continue to follow the latest developments, please stay alert to our platform for more updates.
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.
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