Evergrande’s debt crisis: International creditors threaten legal action over ‘opaque’ restructuring process

A group of the company’s overseas bondholders are threatening to take legal action over its “opaque” debt restructuring process, the latest sign of trouble for the embattled Chinese developer.

They said in a statement Thursday they’ve had to “seriously consider enforcement actions” after Evergrande failed to engage substantially with them about reorganizing its operations.

The firm’s “lack of engagement and opaque decision-making to date is contrary to well established international standards in restructuring processes of this magnitude,” the group wrote in its statement. The investors are represented by law firm Kirkland & Ellis and investment bank Moelis & Co.

They said the company’s behavior “tarnishes offshore investors’ views” about expecting fair treatment when investing in Chinese companies, and added they are “prepared to take all necessary actions to vehemently defend its legal rights and protect its legitimate interests.”

Evergrande did not respond to a request for comment from CNN Business about the statement, but said in a Friday filing with the Hong Kong Stock Exchange that it would hire more financial and legal advisers to help “follow up” with demands from creditors.

The real estate developer is one of China’s largest and it’s still reeling under more than $300 billion of total liabilities, including about $19 billion outstanding offshore bonds held by international asset managers and private banks on behalf of their clients.

Evergrande has been scrambling for months to raise cash to repay lenders, and the company’s chairman Xu Jiayin has been reportedly selling off personal assets to prop up its finances.
But time seemed to run out for the company last month, when Fitch Ratings declared that Evergrande had defaulted on its debt — a downgrade that the ratings agency said reflected the company’s inability to pay interest due that month on two dollar-denominated bonds.
There’s also evidence that the Chinese government is guiding Evergrande through a restructuring of its debt and sprawling business operations. The company set up a risk management committee last month that is staffed by officials from state-owned enterprises in Guangdong, where Evergrande is based, along with an executive from a major bad debt management firm owned by the central government.
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But international bondholders say they’ve been left in the dark about the company’s plans. The creditors said in their Thursday statement that they have tried to talk with Evergrande, but have received “little more than vague assurances of intent, lacking in both detail and substance.”

“Actions speak considerably louder than words,” they added, saying that the “overriding impression” is that despite the company’s public words, Evergrande “has disregarded its offshore creditors and the legal rights of its creditors.”

The group added that it recognizes Evergrande’s recent efforts in resuming most of its construction projects, and wants “to be a part of a solution” to help “during these hard times.”

Analysts have been long concerned that a collapse by Evergrande could trigger wider risks for China’s property market, hurting homeowners and the broader financial system. Real estate and related industries account for as much as 30% of the country’s GDP.

Chinese policymakers have also made it clear that protecting domestic homeowners are is a priority, as they want to ensure apartments are delivered to customers, many of whom had already paid for properties before they were completed. Last month, Wang Menghui — the Minister of China’s Housing and Urban-Rural Development — told the state broadcaster that enduring the delivery of home projects and protecting people’s livelihoods were among the government’s main goals this year in tackling risks to the real estate sector.
Evergrande has also made deals with domestic creditors to avoid a formal default on its onshore bond. Earlier this month, it obtained investor approval to delay payments on a 4.5 billion yuan ($707 million) bond.

Evergrande’s debt crisis is wreaking havoc on Hong Kong’s stock market

Shares of Evergrande Group plummeted 10% in Hong Kong on Monday, hitting just 2.28 Hong Kong dollars ($0.29) per share. The stock has shed 84% so far this year, plunging below its 2009 IPO price of 3.5 Hong Kong dollars ($0.45).

The Hang Seng Index (HSI) on Monday dropped 3.3%, suffering its worst decline in nearly two months, as Chinese banks, insurers and other real estate companies were slammed.
Evergrande is facing a few critical deadlines this week. It was supposed to repay interest on some bank loans on Monday, according to Bloomberg. The news outlet recently reported that Chinese authorities have told major banks that they won’t receive those payments.

Evergrande did not immediately respond to a request from CNN Business for comment about those payments.

And interest payments totaling more than $100 million are due later this week on two of the company’s bonds, according to data provider Refinitiv.

But it’s not clear how much — if any — of those debt obligations Evergrande will be able to meet. The group is China’s most indebted developer, with more than $300 billion worth of liabilities. Over the last few weeks, it’s warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly.

Evergrande’s debt burden is so large that analysts have warned that risks could spread throughout China. The company holds about 6.5% of the total debt held by China’s property sector, according to an estimate by UBS.

The Hang Seng Property Index, which tracks major developers listed in the city, sank 6.7%, hitting its lowest level since May 2016. The chill might have been exacerbated by a Reuters report late Friday afternoon, which cited anonymous sources as saying that Beijing has called on Hong Kong’s powerful property tycoons to pour resources and influence into backing Beijing’s interests.
Hong Kong developers New World Development (NDVLY) and Chinese Estates Holdings, well known as Evergrande’s long-time allies that often supported the company by buying its bonds or part of its stakes, fell 12.3% and 8.5%, respectively. Another Chinese property developer, Country Garden, lost more than 6%.
The sell-off spread to shares of Chinese banks and insurance companies. Ping An Insurance — the country’s largest insurer and one of its biggest property investors — slid nearly 6% on Monday to its lowest level since 2017. The heavy losses came even though Ping An said Friday that the company has “zero exposure” to Evergrande, while risks to its other property investments were “controllable,” according to Chinese state media.

Mainland Chinese stock and bond markets were shut Monday for a public holiday and will reopen on Wednesday.

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Goldman Sachs analysts warned of “rising risks” from the Chinese property market.

“Concerns over Evergrande are rising and signs of financing difficulties spreading to other developers are emerging,” they said in a research report published Sunday night. The Chinese government needs to “carefully manage” Evergrande’s potential default or restructuring, while delivering a clear message to help “shore up confidence and to stop the spillover effect,” they said.

Evergrande has about 200,000 employees, raked in more than $110 billion in sales last year and has more than 1,300 developments, according to the company. Its huge liabilities are widely held by financial institutions, retail investors, homebuyers and suppliers in the construction, materials and design industries.

Trouble at the heavily indebted property giant has been brewing for the past year. In August 2020, Beijing began containing the property sector’s excessive borrowing in an attempt to prevent the housing market from overheating and to curb debt growth.

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Evergrade’s liquidity crisis has intensified in recent weeks, triggering a further plunge in the company’s stocks and bonds.

Early last week, the Chinese media outlet Caixin reported that several hundred people who had invested in an Evergrande wealth management product surrounded the company’s Shenzhen headquarters, demanding their money back.

They also questioned a senior Evergrande executive, who they claimed had redeemed his investment several months ago, suggesting that he had known the extent of the company’s problems before telling investors.

The company on Friday warned that six of its executives could face “severe punishments” for cashing out early on the wealth management product. On Saturday, the company said it would start repaying its wealth management investors with real estate.