- On 22 September, Evergrande announced that the scheme meeting on 25-26 September will be cancelled. The Group said it is because the sales has not been as expected, and therefore it is necessary to re-assess the terms of the restructuring plan to meet the company’s situation and the demand of the creditors.
- Two days later, the Group further stated that since the onshore subsidiary Hengda Real Estate is being investigated, it cannot meet the qualifications for the issuance of new notes under the regulations promulgated by National Development and Reform Commission.
- In theory, it is not necessary to directly cancel the meeting even if Evergrande cannot obtain sufficient support from Class C creditors, and thus it is more likely that the decision is made upon other factors.
- Instead of the sales condition, we believe that the inability to issue new bonds is the key reason for the collapse of this restructuring plan. After all, the earliest time that Evergrande is required to pay cash interests is about 2.5 years from today, and the amount is very small as well, so the current sales figures should not be a crucial factor.
- Since Hengda Real Estate has been listed as an ‘untrustworthy entity’, the Chinese authorities can invoke relevant regulations to prohibit the company from issuing new bonds. However, there is a question of whether Evergrande is facing ‘special treatment’, given that some of the other defaulted Chinese property developers were able to proceed their restructuring process through bond issuance, and the proposed bond issuer in Evergrande’s restructuring plan is actually the offshore company China Evergrande Group (although Hengda Real Estate will still be the keepwell provider for the new bonds in Tianji and Scenery Journey’s schemes).
- In fact, according to Hong Kong Economic Journal, the major resistance for Evergrande to push forward the restructuring plan is that the Chinese government “has an opinion on Evergrande and is watching it more closely”; Caixin also reported that Evergrande ex-CEO Xia Haijun and ex-CFO Pan Darong have been detained by authorities or swept up by investigations recently, showing that the relationship between the Group and the government is quite bad at this moment. It is possible that the situation will not improve until the investigation is completed.
- According to our understanding, Evergrande’s financial advisor will continue to communicate with the National Development and Reform Commission to figure out how to get the permission for bond issuance. If the Group is unable to issue new bonds, then it can only be restructured through debt-to-equity conversion. However, the feasibility is low given that the current value of the shares is far from enough to cover the amount of debts.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in EVERRE 8.250% 23Mar2022 Corp (USD) and EVERRE 7.500% 28Jun2023 Corp (USD), and the analyst who produced this report holds a NIL position in the abovementioned securities.
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