China Evergrande Group, once among China’s biggest developers and now a poster child for its property crisis, laid out details of a multi-billion dollar restructuring plan that calls for its offshore creditors to swap their debt for new securities.
The proposal, released Wednesday and coming 15 months after Evergrande first defaulted on its public dollar bonds, addresses debt tied to China Evergrande, its Scenery Journey Ltd. unit and offshore financing arm Tianji Holding Ltd.
Evergrande credit investors can receive new notes maturing in 10 to 12 years or a combination of new debt and instruments tied to the shares of Evergrande’s property-services unit, its electric-vehicle division or the builder itself, the company said in a Hong Kong Stock Exchange filing. Scenery Journey creditors are slated to get $6.5 billion ($8.61 billion) of new bonds, while Tianji investors will receive US$800 million of new notes.
For the first two-and-a-half years, interest on the new notes can be paid in cash or in kind, meaning with more debt.
“The plan is not perfect,” but rather a compromise and “better than nothing,” said Ting Meng, a senior credit strategist at Australia & New Zealand Banking Group Ltd. She doesn’t see China Evergrande’s bond curve moving much, adding, “It could make investors more cautious when investing in distressed developers.”
Evergrande said the debt restructuring would allow it to focus on returning to normal operations. That will require additional financing of 250 billion yuan ($48.46 billion) to 300 billion yuan to “ensure delivery of properties,” the company said. Tianji will require an estimated 1 billion to 2 billion yuan.
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“The risk this can’t be covered by unleveraged free cash flow from its projects means there could be prolonged delay in completing some of its 1,316 projects,” wrote Bloomberg Intelligence analysts Kristy Hung and Lisa Zhou. “This would be a fresh blow to buyer confidence in private developers’ projects just as China’s housing sector is starting to recover.”
Meanwhile, Evergrande said that its electric-vehicle business faces “the risk of shutdown” in the absence of new funding. The operation has taken steps to cut costs, including cutting its work force by a quarter in the past nine months.
“It’s very hard to estimate the equity value” of the two Evergrande units given trading of their shares has been suspended for a year, said Eddie Chia, portfolio manager at China Life Franklin Asset Management Co. “The equity could be worthless.”
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The debt restructuring will be implemented through schemes of arrangement or other proceedings that may take place in courts in the Cayman Islands, Hong Kong and the British Virgin Islands, the developer said. Such procedures typically require approval from at least 75% of creditors in value.
Evergrande bondholders will have about US$31.7 billion in outstanding principal as of the restructuring’s effective date, which the company estimates will be in October. The ultimate recoveries would depend on the performance of the securities that bondholders choose.
In the case of Scenery Journey creditors, they will have US$5.2 billion in outstanding principal, meaning that the new debt of US$6.5 billion could lead to a recovery of more than 120 cents on the dollar if obligations on the new notes are met.
Two Scenery Journey dollar bonds maturing late this year jumped the most in 18 months Thursday morning, rising 3 US cents to 9 US cents according to data compiled by Bloomberg.
At current levels, “I don’t think Evergrande’s dollar bonds are cheap based on the recovery rate indicated,” especially with the wait because the restructuring needs court approval, said Zerlina Zeng, senior credit analyst at CreditSights.
If the restructuring isn’t successful and Evergrande liquidates, unsecured offshore debtholders would recover around 9.73 billion yuan, according to the company. That means noteholders would stand to recover 2.05% to 9.34% depending on what securities they hold.
Based on that liquidity value, “Evergrande’s plan is much better than expected, which was quite low,” said Xu Liqiang, portfolio manager at Shanghai Silver Leaf Investment Co. Still, “the chance for Evergrande to pay off its debt in 12 years is low. To achieve that, the onshore housing market will have to prosper for more than 10 years consecutively.”
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Evergrande, which is still the world’s most-indebted developer, said during a court hearing this week that a restructuring support agreement is expected to be ready by month’s end. An ad-hoc group of offshore bondholders expressed backing for the company’s debt overhaul plans after terms were sweetened, Bloomberg reported Sunday.
The signs of progress allowed for a winding-up petition against the builder to be adjourned to July 31.
Evergrande missed several self-imposed 2022 deadlines to disclose a debt-restructuring framework. The overhaul will be among the country’s largest ever — potentially impacting banks, trusts and millions of home owners. It could also provide guideposts for other developers’ restructurings.
Questions about Evergrande’s debt-repayment abilities fueled broad worries about Chinese builders in the wake of a government-led leverage crackdown that squeezed developers’ liquidity. Property firms defaulted on a record amount of dollar bonds last year.
“The restructuring doesn’t seem to solve the problem of generating cash through the core property business, which still sees a huge US$40 billion investment,” said Andrew Collier, a managing director at Orient Capital Research Inc. “Beijing appears to be unwilling to encourage — or force — banks to lend to Evergrande. So their troubles are not over.”
