Tuesday, May 24

The world’s financial markets at risk from the planet’s most indebted developer

Chinese authorities are considering a proposal to dismantle China Evergrande Group by selling most of its assets, according to people familiar with the matter.

The restructuring proposal, submitted to Beijing by officials from the home province of Evergrande, Guangdong, requires the developer to sell most of the assets except its separately-listed electric vehicle and property management units, said the people, who asked not to be identified because the matter is private. A group led by China Cinda Asset Management, a state-owned bad debt servicer and a major creditor of Evergrande, would take over unsold real estate assets, the people said.

If approved by top officials in Beijing, the plan would mark the Xi Jinping government’s biggest step yet to prevent a disorderly collapse of the world’s most indebted developer from disrupting China’s financial markets and economy. China ahead of a closely watched Communist Party leadership transition later this year.

Proceeds from asset sales would be used to pay off creditors, although it is unclear to what extent banks and bondholders would be forced to take cuts in their claims. Major Chinese regulators have repeatedly said in public statements that debt risks in Evergrande and other struggling real estate ventures must be approached in a “market-oriented manner.”

Electric vehicle and property management companies Evergrande, with a combined market value of nearly $9 billion, would initially remain untouched under the proposal but could be sold at a later date, the people said. A custody account would be set up for these assets to offer some protection to offshore investors, one of the people said.

If Beijing approves the plan, it would initiate a rollback of the debt-ridden developer started 25 years ago by billionaire chairman Hui Ka Yan. It’s also likely to spark a long battle over who gets paid from what’s left.

Investors will closely examine the size of the cuts that will ultimately be borne by creditors for clues as to how Xi plans to balance the sometimes conflicting goals of reducing moral hazard in China’s financial system. China and maintain economic stability. The Chinese leader, who is widely expected to secure a precedent-defying third term this year, and potentially extend his rule even further, has also been trying to rein in the billionaire class as part of his “common prosperity” campaign. to reduce a huge wealth gap.

While Xi surprised many investors with his pledge to curb financial excesses in real estate, the government recently eased its crackdown amid growing concerns about contagion across the industry. The International Monetary Fund warned on Tuesday that the slowdown in housing in China is among the risks to global economic growth.

Cinda, in response to questions from Bloomberg, said he “has no material information to disclose at this time.” The officials of Evergrande and the Guangdong government did not immediately respond to requests for comment. REDD reported on some aspects of Guangdong’s proposal last week and said officials could announce a framework before March 5.

The actions of Evergrande They fell 4.5% at 1:29 p.m. in Hong Kong and its dollar bonds were little changed.

The developer said in a statement Wednesday that it plans to submit a preliminary restructuring proposal within the next six months. Earlier, it urged offshore bondholders not to take aggressive legal action over repayments, after an ad hoc group of holders said the company failed to substantially engage with it in restructuring efforts. Evergrande has begun the bondholder identification process and plans to hire additional financial and legal advisors.

The developer was first labeled delinquent in December after it missed payments on several bonds. Evergrande established a seven-member risk management committee at the time to “actively engage” with creditors.

The panel includes senior executives from Cinda and state-owned companies from the province of Guangdong. Evergrande has also appointed the president of China Cinda as non-executive director. On Wednesday, China Business News reported that regulators recently held a meeting with several asset management companies to discuss their involvement in property developers’ asset sales.

The shortage of cash Evergrande it has become a focus for global investors, worried that a collapse could trigger financial contagion and stunt growth in the world’s second-largest economy, which relies on housing for about a quarter of gross domestic product.

The developer has seen its bonds trade at deep discounts to par as investors brace for what could be one of the biggest restructurings in US history. China. The dollar bill Evergrande due in 2025 was indicated at around 16 cents on Thursday. Its shares have plunged almost 90% since the beginning of 2021.

While the Chinese authorities have eased their real estate crackdown in recent weeks, they have made it clear that they have no interest in bailing out Evergrande. In October, the central bank blamed the developer’s woes on its “blind expansion and diversification” and its inability to operate prudently amid changing market conditions.

Evergrande it has made little progress selling assets in recent months, even after Hui invested stakes in once-prized businesses such as a bottled water unit on the block. In October, the developer called off talks to shed a majority stake in its property management business, which could have raised about $2.6 billion. Plans to sell its Hong Kong headquarters have also stalled.

Electric cars and utility units are now worth more than Evergrande, whose market value has plummeted to less than $3 billion. China Evergrande New Energy Vehicle Group, which also collapsed last year, has yet to mass-produce any cars. Evergrande Property Services Group manages and services apartments built by Evergrande and other developers.

Evergrande has been prioritizing payments to migrant workers and suppliers as regulators urge the company to avoid any risk of social unrest.

It is also under pressure to finish the homes of 1.6 million buyers who have already put down deposits, and must repay retail investors who bought some of its equity products used to finance construction. The developer has more than $300 billion in total liabilities, including more than $19 billion in offshore bonds.