An Offshore Investor Call Held by Evergrande
At 7pm on January 26, Evergrande held its first offshore investor call since the default of Tianji’s bonds.
The call only lasted for 20 minutes and did not include a Q&A section. Evergrande mainly delivered the following messages:
- They target to offer a debt restructuring proposal in 6 months
- They urge creditors to not take aggressive legal actions against the Group
- Several SOEs and large-scale companies in the risk committee are working together to solve the problem
- There is no definite answer as to how the keepwell bonds (TIANHL) will be handled, but the Group will give a solution for these bonds in the restructuring plan
Recently, a group of Evergrande’s USD bondholders announced that it is considering to take enforcement action to prevent Evergrande from disposing assets. Meanwhile, it was reported that Oaktree Capital seized the ownership of ‘Project Castle’, a land project located in Yuen Long, which was a key piece of collateral in Evergrande’s offshore debt restructuring plan.
Thus, we believe the most important thing that Evergrande wanted to address out of the four points listed above, is for creditors to not take legal actions that will affect the restructuring progress, such as a forced liquidation or asset takeover.
Offshore Assets Remain as the Key
On the other hand, news coverage on Evergrande was little compared to other distressed developers over the last month.
A piece worth highlighting is, REDD intelligence reported that Guangdong Government plans to release Evergrande’s debt restructuring framework by March. The preliminary plan is to restructure the debt out of court and separate the firm’s offshore debt and assets from its onshore restructuring. It aims to repay around 150 billion yuan of offshore debt using proceeds from the sale of Evergrande’s offshore assets (including the 59% and 61% ownership of Evergrande New Energy Vehicle and Evergrande Property Services respectively).
This unverified news echoed our previous viewpoint: onshore assets are harder to recover, while the most important assets are the equity ownership of several listed companies. Besides, if the news is real, the public bonds of USD 21.85 billion already accounted for more than 90% of its total offshore debt, and the remaining portion comprises private bonds and syndicated loans.
Considering that Hui Ka Yan previously mentioned that the new energy vehicle business will become the focus of the Group's future development, the direct liquidation of all the ownership may not come along. Therefore, we believe that the recovery value calculated using the market value of Evergrande New Energy Vehicle and Evergrande Property Services is for reference only. The most likely scenario is still a direct restructuring plan proposed by the Group, which may include several actions such as bond exchange and extension, haircut, and replacing debt with equity.
Will State-Owned Enterprises (SOEs) Get Involved?
Last December, Evergrande established a risk management committee that consisted of the senior management from other sizeable state-owned enterprises, such as Guangdong Holdings, China Cinda, Yuexiu Holdings and Guosen Securities (largest shareholder is Shenzhen Investment Holdings). It led to speculations on whether there would be SOEs purchasing Evergrande's assets.
Recently, the SOEs in Shenzhen including Shenzhen SEZ Construction and Development Group and Shenzhen Investment Holdings started taking actions; with the former becoming the largest shareholder of China South City, and the latter was reported to establish a preliminary acquisition intention with a subsidiary of Kaisa Group.
On January 27, market rumored that one of the big four state-owned asset management companies, China Cinda, would take the lead and purchase any unsold property assets of Evergrande. Proceeds from the asset sales would be used to repay creditors. Although Evergrande's enormous debt size is unlikely to be fully resolved with the help of individual companies, we can expect the Government to take a proactive stance in dealing with the debt crisis within the real estate sector. Therefore, we should be able to see the participation of many SOEs in the Group’s upcoming debt restructuring plan.
What to Look Out for Next?
Evergrande successfully postponed the put option and coupon date (January 8) of the onshore corporate bond ’20 Hengda 01’ for half year previously. The next thing the Group will face is the two bond coupons of USD 255 million, which the last day of grace period is January 28. The next bond principal maturing is the EVERRE 8.250% 23MAR2022 CORP (USD) on March 22, which has an outstanding amount of USD 2.03 billion.
Meanwhile, the defaulted keepwell bonds issued by Tianji Holdings (TIANHL) should have lower repayment priority compared to bonds issued directly by Evergrande (EVERRE), based on what we heard from the Group in the investor call.
Evergrande is actively identifying offshore creditors recently, and also hired China International Capital Corporation (CICC) and Bank of China International (BOCI) as financial advisors. Based on its current situation, we believe that there will be more concrete developments in the next few months, please stay alert to our website 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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