Evergrande May Be Unable to Meet Its Guarantee Obligations
At 8pm last Friday (December 3), Evergrande announced that it is formulating a viable restructuring plan for offshore indebtedness. In addition, the Group has received a demand to perform its obligations under a guarantee, “in the event that the Group is unable to meet its guarantee obligations or certain other financial obligations, it may lead to creditors demanding acceleration of repayment.”
Its guarantee obligations total USD$260 million. Considering that the principal amount of the private bond issued by Jumbo Fortune (and due on October 3) is also exactly US$260 million, we think the guarantee obligations mentioned by Evergrande should be this bond.
In mid-October, REDD Intelligence reported that repayment for this Jumbo Fortune bond had been extended by more than three months. It was also rumoured that Chairman Hui Ka Yan used his mansion located on Black’s Link, The Peak, as collateral and therefore successfully obtained the consent of the creditors.
Theoretically, the new maturity date should be on or after January next year. However, creditors have demanded for repayments to be made on December 3, which means there may be clauses in the original extension agreement that can trigger an earlier maturity.
Quick Response from Regulators
Within two hours after Evergrande’s announcement, several regulators have already issued responses, including the Guangdong Government, People’s Bank of China, China Banking and Insurance Regulatory Commission, and China Securities Regulatory Commission. These regulators mainly reiterated that the Evergrande crisis is only an individual event, and its impact on the capital markets is manageable.
That night, the Guangdong Government summoned Hui Ka Yan to discuss the matter, and agreed to send a working group into Evergrande to improve its risk management and maintain normal operations.
Given the speed in which these regulators responded, we can see how much importance has been placed on Evergrande. Although this does not mean the Government will rescue Evergrande, we believe that it is difficult for the Group to adopt a ‘do nothing’ strategy. In the evening of December 6, Evergrande announced its plan to establish a risk management committee. In addition to Chairman Hui Ka Yan and CFO Pan Darong, the committee also includes the senior management from other sizeable state-owned enterprises, such as Guangdong Holdings, China Cinda, Yuexiu Holdings and Guosen Securities, reflecting the proactive stance taken by the officials.
How Evergrande deals with their guarantee obligations will become a focal point for the market. Regardless of whether Evergrande defaults or enters into a debt restructuring, the whole picture of future developments should gradually become clearer.
Coupons Are Still Missing for Tianji Holdings’ Bonds
On the other hand, December 6 is also the last day of the 30-day coupon grace period for two USD bonds issued by Scenery Journey and guaranteed by Tianji Holdings (Bond Code: TIANHL). These coupons total an approximate USD82.5 million.
Despite the possibility that a default of these two bonds may trigger a cross default of other USD bonds, Hengda Real Estate (onshore subsidiary of Evergrande) is merely the keepwell provider under its current bond issuance structure. As this type of keepwell agreement should carry no legal effect, Hengda Real Estate may have the right to not recognize the debt.
For China Evergrande, we believe that the repayment priority of these two bonds is even lower than the Jumbo Fortune private bond which is directly guaranteed by the Group. At the time of publication, the two TIANHL bonds have yet to distribute coupons.
Progress of Asset Sales
Recently, the Group has sold off its equity stake in Hengten Network (Stock Code: 0136.HK) on November 18, and also liquidated part of its shares in Calxon City (Stock Code: 000918.CH) on December 1. After terminating its sale of Evergrande Property Services (Stock Code: 6666.HK) to Hopson Development, the Group still holds an approximate 61% ownership.
(Related article: Evergrande made its offshore bond coupon payment, now what?)
After announcing its plan to transform into an electric vehicle company, Evergrande New Energy Vehicle (Stock Code: 0708.HK, 64% owned by the Group), has become its most valuable asset. However, although Evergrande New Energy Vehicle has informed the Ministry of Industry and Information Technology of its first compact SUV model "Hengchi 5 LX", they have yet to share further details on the actual period for mass production and public sales. Therefore, it is expected that the company's share price will continue to be volatile under the influence of market news.
Should the Group enter a restructuring process, we expect USD bondholders to take an active approach to claim against its offshore assets. Nevertheless, if the funds obtained from asset sales are wired back onshore for home construction purposes, it will greatly eat into the recovery value of the bonds. Therefore, the race between the debt maturity deadlines and asset sales will be key to its future developments.
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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