China Evergrande shares fall sharply after $2.6bn
asset sale collapses
‘No guarantee’ Chinese property giant can meet its
$305bn debts, starting with a deadline on Monday that could trigger default
Evergrande shares fell in early trading on Thursday
amid concerns about unsustainable debts, sparking fears of contagion in China’s
real estate sector. Photograph: Héctor Retamal/AFP/Getty Images
Martin
Farrer and agencies
Thu 21 Oct
2021 09.58 BST
Shares in
the struggling property giant China Evergrande have fallen sharply after plans
to offload a stake in one of its units for $2.6bn fell through, casting further
doubt over whether it can avert the country’s biggest ever corporate failure.
China
Evergrande Group, the parent company for the sprawling empire built by former
steel industry executive Xu Jiayin, closed down 12.54% in Hong Kong on
Thursday.
Evergrande
announced on Wednesday that it had formally abandoned plans to sell a 50.1%
slice of Evergrande Property Services, one of its most profitable units, and
said there was “no guarantee” it could meet its financial obligations in order
to stay afloat.
The
company, which is China’s second-biggest property developer with thousands of
projects, has debts of $305bn.
But it is
running out of cash thanks to a government crackdown on lending, and a slump in
property sales and prices, sending shockwaves through the Chinese economy and
global financial markets.
The company
has been trying to offload assets since September to generate funds to repay
creditors, starting with 1.6 million homebuyers who have bought as-yet
unfinished properties off the plan, building contractors and suppliers, and
then Chinese banks and bondholders.
Evergrande
also owes billions to offshore bondholders and has already missed several key
bond interest payments since September. The company will officially go into
default if it fails to stump up $83.5m when a 30-day grace period for a
repayment originally missed in September ends on Monday.
Creditors
say Evergrande has not made contact about the repayments and it is widely
expected that it will default.
In another
development on Thursday, it was reported that China Evergrande had won a “more than
three-month” extension to the maturity of a $260m bond issued by a company
called Jumbo Fortune Enterprise. It is a joint venture whose owners include
Hengda Real Estate, Evergrande’s main onshore unit.
The bond,
details of which have not been made public and remain “opaque” according to
market experts, was guaranteed by Evergrande beyond 3 October, after it agreed
to provide extra collateral, REDD reported, citing holders of the bond.
The
admission on Wednesday that Evergrande had failed to sell a 50.1% stake in its
Evergrande Property Services arm to smaller rival Hopson Development Holdings
for $2.6bn was a huge blow.
In a stock
exchange filing late on Wednesday, Evergrande said it had reason to believe
that Hopson had not met the “prerequisite to make a general offer” for its
unit, without elaborating further.
Hopson said
in an exchange filing that it had been prepared to complete the deal but had
received a transaction termination notice from Evergrande on 13 October.
Shares in
Evergrande, Evergrande Property Services and Hopson had all been suspended
since 4 October pending the deal announcement. They all resumed trading on
Thursday with Evergrande Property Services closing down 8%.
In a
separate exchange filing on Wednesday, Evergrande said it had made no material
progress in selling other assets it has put on the block except for its sale of
a stake worth $1.5bn in Chinese lender Shengjing Bank.
The setback
for Evergrande comes after Chinese state-owned Yuexiu Property pulled out of a
proposed $1.7bn deal to buy its Hong Kong headquarters last week.
Evergrande’s
disclosures came after a number of top Chinese officials had sought to reassure
homebuyers and markets that the current woes in the property sector would not
be allowed to turn into a full-scale crisis.
Worries
that a cash crunch at Evergrande, whose liabilities are equal to 2% of China’s
gross domestic product, could cause economic contagion have seen swathes of
other heavily indebted developers hit with credit rating downgrades, while some
smaller ones have already defaulted.
In comments
reported by state media Xinhua and echoing words from the country’s central
bank late last week, vice-premier Liu He told a Beijing forum on Wednesday that
the risks were controllable, and that reasonable capital demand from property
firms was being met.
The
chairman of China’s securities regulator, Yi Huiman, added at the same forum
that authorities would properly handle the default risks and look to curb
excessive debt more broadly.
“[We need]
to improve the effectiveness of the constraint mechanism on debt financing, to
avoid excessive financing through ‘high leverage’,” Yi said.
Chinese
property developers have total outstanding debt of 33.5tn yuan ($5.24tn),
according to Nomura, equivalent to roughly a third of the country’s gross
domestic product.
Evergrande,
which has epitomised China’s freewheeling era of borrowing and building, has
been scrambling to raise funds to pay its many lenders and suppliers, amid
expectations it is about to formally default on one of its international bonds.
In another filing
on Wednesday, Evergrande said it would continue to implement measures “to ease
the liquidity issues” and would use best efforts to negotiate for the renewal
or extension of its borrowings with its creditors.
“In view of
the difficulties, challenges and uncertainties in improving its liquidity,
there is no guarantee that the group will be able to meet its financial
obligations under the relevant financing documents and other contracts,” it
said.
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