On the evening of January 26, China Evergrande gave it a six-month timeline for a preliminary debt restructuring.
On the evening of 26 January 2022, China Evergrande (03333) announced that it had held a conference call with creditors reiterating that it would assess its own situation and formulate a restructuring plan to protect the rights of stakeholders. At present, the group is promoting the work of auditors to propose a preliminary restructuring plan in the next six months.
On January 27, Evergrande's stock price closed at HK$1.71, down 3.39%.
In the past few days, China Evergrande has issued announcements one after another, and the sentiment of the capital market has also been stimulated and provoked.
On January 24, Evergrande announced that it had launched an active dialogue with overseas creditors. Foreign creditors are called upon not to take any radical legal action. Market data shows that Evergrande's overseas liabilities exceed 150 billion yuan (US$23.64 billion), the vast majority of which (about US$21.85 billion) are public bonds.
On the evening of January 23, China Evergrande issued a change of director announcement, saying that from January 23, 2022, Shaun was appointed as an executive director and Liang Lin was appointed as a non-executive director. At the same time, Lai Lixin and Huang Xiangui resigned as executive directors.
Shaun is an insider of the Evergrande Department and the chairman of Evergrande Automobile. What attracted more attention from the market was the addition of Leung Lam, who was then the chairman of Cinda Hong Kong. Cinda Hong Kong's main business is domestic and foreign non-performing asset investment, equity investment, mezzanine investment, debt investment and securities investment, etc., and is a wholly-owned subsidiary of China Cinda, which is a member of Evergrande Risk Committee.
Mr. Leung has over 30 years of experience in banking and asset management and is currently the Vice Chairman of the China Financial Association in Hong Kong. Liang Forest's entry indicates that Evergrande's debt restructuring is in an orderly manner.
After the announcement, market confidence was greatly boosted, and on January 24, China Evergrande's stock price rose in response. During the day, China Evergrande returned to HK$2 at one point, closing at HK$1.86, up 3.91%.
The above is the latest situation of Evergrande's debt problem.
Evergrande has been running out of debt problems for a year and a half
Evergrande's debt problem can be traced back to the beginning of June 2020, when some Evergrande commercial ticket holders said that their commercial tickets could not be redeemed as scheduled, and after contacting China Evergrande, they were told that the commercial tickets still need to be queued up after the expiration date before they can be paid, and the waiting time cannot be predicted. After that, China Evergrande responded positively and redeemed some of the expired commercial tickets one after another.
In September of the same year, a "Report on the Situation of Evergrande Group on Pleading for Support for Major Asset Restructuring Projects" was widely circulated on the Internet, and then Evergrande debunked the rumor that the document was completely untrue and started the payment of physical assets.
On September 30, 2020, some construction contractors said that Evergrande commercial tickets were once again overdue. On the same day, the Bank of China, the Agricultural Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China will review their exposure to Evergrande to measure its impact.
After that, Evergrande took a variety of ways to raise funds. In September 2020, Evergrande began to sell houses at a reduced price; in February 2021, Evergrande promoted some properties at a 25% discount and provided a 22% discount on all properties it sold, including office and commercial properties; on October 13, 2020, Evergrande announced that it would raise at least HK$4.3 billion (US$555 million) through a rights issue and 2.1 billion yuan through domestic notes; on November 1, 2020, Evergrande Group sold its holdings of Guanghui Group for 40.984% On June 25, 2021, Evergrande Group sold its 100% shareholding in Evergrande Culture; on August 2, 2021, Evergrande said it planned to sell 120 billion yuan of assets, including its old renovation project in Shenzhen.
During this period, Evergrande promoted the spin-off and listing of Evergrande Automobile and Evergrande Property. At the end of 2020, Evergrande Property landed on Hong Kong stocks, and on August 10, 2021, Evergrande announced that the company is planning to sell some of its assets, including some shares of Hong Kong-listed Evergrande Automobile and Evergrande Property, with a total value of about HK$3.25 billion.
At the same time, part of the debt was repaid in advance through its own funds. In the four months after September 2020, Evergrande used its own funds to repay its debts in advance on four occasions, with a cumulative debt repayment of more than HK$47.7 billion.
On June 30, 2021, Evergrande announced that it had successfully reduced its total debt to US$88.2 billion and reduced its net debt ratio to less than 100%.
But Evergrande's debt problem is far from over.
On the evening of December 3, 2021, China Evergrande announced that it could not fulfill an overseas guarantee obligation of US$260 million, which seems to be worth mentioning in Evergrande's huge liabilities, but it means that Evergrande has officially opened the prelude to debt default. In the next trading day, Evergrande's stock price fell by nearly 20%.
The scale of liabilities is not optimistic
At the same time as Evergrande's debt problem fermentation is the strongest regulatory policy of China's supervision on the real estate industry.
On August 20, 2020, China's regulators issued new regulations on the "three red lines" for the financing of housing enterprises (one is that the asset-liability ratio after excluding pre-collection shall not be greater than 70%, the second is that the net debt ratio shall not be greater than 100%, and the third is that the cash short-term debt ratio shall be less than 1). According to this provision, if the housing enterprise touches three red lines at the same time, it is not allowed to add new interest-bearing liabilities.
And China Evergrande's third line is all stepped on. In other words, Evergrande must not add new interest-bearing liabilities. This is a huge impact on capital-intensive real estate companies, which means that Evergrande cannot use leverage to expand its business, and can only use its own funds, but the business cannot expand, and the growth of its own funds will also decline.
In the first half of 2021, China Evergrande achieved revenue of 224.066 billion yuan, down 16.69% year-on-year. In 2020, the operating income increased by only 6.45% year-on-year.
At the same time, the centralized real estate loan system introduced by China also puts forward higher requirements for the cash flow of real estate enterprises represented by Evergrande. As of the first half of 2021, China Evergrande's cash and cash equivalents were 86.772 billion yuan, down nearly half from 158.752 billion yuan at the beginning of the year.
Since the release of the "three red lines" new regulations, Evergrande's first task is to reduce its liabilities. According to the financial report, as of June 30, 2021, China Evergrande's current liabilities were 1.57 trillion yuan and non-current liabilities were 0.39 trillion yuan, totaling nearly 2 trillion yuan.
Evergrande said its net debt ratio has fallen below 100%, achieving a red line to turn green.
However, JPMorgan Chase believes that Evergrande's net debt ratio in the first half of 2021 will be at least 177%, rather than below 100% it announced. JPMorgan analysts believe that Evergrande Group has transferred some of its interest debt payable to off-balance sheet debt, rather than real deleveraging, and commercial paper, wealth management products and perpetual bonds are not officially included in the debt.
Evergrande's stock price has changed sharply as its debt problems have gradually surfaced. From HK$27 in July 2020, it fell all the way to December 24, Evergrande's stock price closed at HK$1.48, the lowest closing price in Evergrande's history.
The worst is over?
Recently, Evergrande's stock price has bottomed out, or even risen slightly. This situation coincides with the expected warming time of China's real estate market.
On January 18, 2022, the regulatory authorities held a press conference saying that since the second half of 2021, the risks of individual real estate enterprises such as Evergrande have become apparent, and affected by this, the risk aversion of various real estate entities has risen, and financial institutions have also experienced short-term stress responses. In view of this situation, the financial management department took countermeasures at the first time, cooperated with the Guangdong Provincial Government, relevant departments and local governments, and did a good job in risk mitigation of insurance enterprises; guided banking financial institutions to accurately grasp and implement the prudent management system of real estate finance, maintain the smooth and orderly delivery of real estate credit, and meet the reasonable financing needs of the real estate market.
Since mid-December 2021, there has also been a marked easing of Monetary Policy in China. On 20 January 2022, the central bank announced that the one-year loan market quotation rate (LPR) had been cut for two consecutive months from 3.8% to 3.7%, while the five-year LPR was cut from 4.65% to 4.6%. The last time these two indicators were lowered was in April and May 2020.
Recently, there have been some views in the market, optimistic about the real estate market in 2022, that although the general direction of "housing is not speculation" and "three red lines" will not change, the real estate market will appear marginal relaxation.
At the beginning of 2022, the Central Bank of China and the China Banking and Insurance Regulatory Commission jointly issued the Notice on Doing a Good Job in M&A Financial Services for Risk Disposal Projects of Key Real Estate Enterprises) to financial institutions, requiring banking financial institutions to carry out real estate project M&A loan business in a sound and orderly manner in accordance with the principles of legal compliance, risk controllability and commercial sustainability, and focus on supporting high-quality real estate enterprises to merge and acquire high-quality projects of real estate enterprises with operational risks. At the same time, relevant M&A loans are no longer counted in the "three red lines".
Guosheng Securities believes that the real estate demand side policy is on the way to relaxation, real estate substantial loosening can be expected, the growth rate of infrastructure in 2022 is expected to exceed expectations, and it is necessary to pay close attention to investment opportunities in stable growth chains such as real estate and infrastructure.
Evergrande's latest announcement said that it will strive to propose a restructuring plan within six months, which also shows that the disposal plan for Evergrande's debt problem will be introduced, although its debt problem is far from being solved, but it seems that the risk has been fully exposed, and the worst time seems to have passed.
However, after the reorganization, is Evergrande still Evergrande?
Wen | writer for the Chinese edition of Barron's Huang Yingfang
Edited by | Wu Haishan
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