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The Chinese government is convening a group of accounting and legal experts to examine the financial status of China Evergrande Group, a potential pioneer in the restructuring of the world’s most indebted developer.
Two people familiar with the matter said that the regulator in Evergrande’s hometown of Guangdong Province dispatched a team from King & Wood Mallesons last month. The law firm’s specialty is restructuring. Two people familiar with the matter said they asked to discuss private information anonymously. . One of the people familiar with the matter said that at the urging of Beijing, provincial officials also sent additional financial advisers and accountants to evaluate developers.
This move further shows that the Chinese authorities are laying the groundwork for what may become one of the country’s largest debt restructurings. Although Beijing’s top leaders have not yet indicated whether they will allow Evergrande’s creditors to suffer significant losses, bondholders believe that the possibility of bailout is small. A person familiar with the matter said that Guangdong officials rejected at least one rescue request from billionaire Evergrande founder Xu Jiayan, who has a controlling stake.
Evergrande said on Tuesday that the company hired its own consultants Houlihan Lokey and Admiralty Harbour Capital to “assess the group’s capital structure” and “find the best solution for all stakeholders.” The disclosure came from an exchange document outlining the company’s financial situation, and Evergrande warned that it was facing “enormous” liquidity pressure.
The company’s share price fell 12% in Hong Kong, extending this year’s decline to 80% and closing at its lowest level since November 2014. Evergrande’s 8.25% U.S. dollar bond due in 2022 fell by about 5.5 cents to 27 cents, with a high probability of default in pricing, according to prices compiled by Bloomberg.
The Hui and Chinese authorities are facing increasing pressure to find a solution to the months-long crisis that has clearly intensified in recent days. The developer’s failure to deliver on its promises to suppliers, retail investors and homebuyers has triggered fears of social unrest after a series of protests in Evergrande offices across China. Protesters gathered at the company’s Shenzhen headquarters for at least the third consecutive day on Tuesday, braving the rain to demand repayment of overdue financial products.
The extent of the losses faced by investors will depend in part on whether the Chinese authorities and state-owned banks take measures to limit the impact. Evergrande, with about US$300 billion in debt, has become the biggest test of whether Chairman Xi Jinping is willing to let overly indebted companies fail when he tries to extract excess funds from China’s 54 trillion US dollars financial system.
If there is no state intervention, Evergrande may enter a downward spiral. Developers said in a statement on Tuesday that due to weakening of home buyers’ confidence, real estate sales in September will generally decline, and they usually need to pay a large down payment for properties that may take several years to complete.
Evergrande said that its plan to sell shares in electric vehicles and property services has not made substantial progress, adding that the sale of its Hong Kong headquarters building has not been completed as expected. Asset sales have always been one of the most important pillars for Evergrande to get rid of the cash crunch plan.
Two people familiar with the matter said that the Guangdong provincial government has encouraged Evergrande’s major banks to set up creditor committees, which will allow banks to take over major decisions including asset disposal. People familiar with the matter say that the banks are unwilling to do this until they receive a clear nod from the national regulator.
A person familiar with the matter told Bloomberg last week that the China Financial Stability and Development Commission, China’s top financial regulator, last month expressed appreciation for Evergrande’s plan to renegotiate payment terms with banks and other creditors on a piecemeal basis. It is unclear whether recent developments, such as investor protests, have prompted Beijing to reconsider.
Evergrande denied rumors that it would file for bankruptcy on Monday night. On Tuesday, it said that Houlihan Lokey and Admiralty Harbour Capital would “explore all feasible solutions to alleviate current liquidity problems.”
According to its website, Houlihan Lokey owns one of the world’s largest financial restructuring businesses and has advised about 1,400 debt claims in excess of US$3 trillion since 1988. Its biggest asset case is Lehman Brothers Holdings.
King & Wood Mallesons hired by Guangdong Province is one of the largest bankruptcy and restructuring service providers in China. He has participated in well-known cases such as HNA Group, Brilliance Automobile Group Holdings Co., Ltd., and China Fortune Land Development.
Bloomberg Industry Research Credit Analyst Daniel Fan said: “After the asset disposal has no specific results, they seem to be embarking on debt restructuring. The first task is to stabilize the holders of wealth management products. This may be a social issue.” “It seems to be developed. Businesses are working hard to reschedule almost all onshore debt, and the next step is to do the same for offshore investors.”
Evergrande, the Guangdong Provincial Government and King & Wood Mallesons did not respond to requests for comment.
Although the developer does not have any bonds due before 2022, it faces a coupon payment of US$669 million this year, including a US$83.5 million one-dollar bill maturing on September 23. When Fitch Ratings downgraded Evergrande’s rating to the junk category last week, it emphasized the increased probability of default on these interest payments.
Howe Chung Wan, head of fixed income in Asia at Principal Global Investors, said: “Hengda will become increasingly difficult to pay offshore debt.” “In our view, the priority now is to carry out an orderly restructuring and manage claims in an organized manner. “
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