Evergrande Group, China’s second-largest property developer by contracted sales, has seen its debt problems deteriorate as two of its subsidiaries failed to discharge guarantee obligations totaling 934 million yuan (US$144.9 million) as scheduled for the wealth management products issued by third parties.
The company said in a filing to the Hong Kong stock exchange on Tuesday that it expected significant continuing decline in its contract sales this month while such a trend would add tremendous pressure on the company’s cashflow and liquidity.
It said other measures adopted earlier to ease its liquidity issues had not reached expected outcomes. The company has hired two financial advisers to assess its capital structure, explore all feasible solutions to ease the current liquidity issue and reach an optimal solution for all stakeholders as soon as possible.
On Tuesday, shares of Evergrande fell 11.87% to close at 2.97 Hong Kong dollars, the lowest since November 2014. The shares have slumped 83% over the past year.
Evergrande’s latest filing to the stock exchange was released after mainland media reported that several hundred people who bought investment products from the property developers’ wealth management arms marched to its headquarters in Shenzhen on Sunday. They said they could not get back their money after the products they bought matured.
One investor said she had visited the building in July over disputes related to Evergrande’s wealth management products.
Du Liang, general manager and executive director of Evergrande’s wealth management division, arrived and tried to calm the protesters. However, Du provoked the crowd by admitting that he got back his own money in a redemption of Evergrande’s wealth products before May 31 as he faced “some family issues.”
He said Evergrande had not faced any financial difficulty before China was hit by an epidemic wave in June and July. He said he was willing to be probed if he had violated any rule.
After a woman fainted and fell down, Du sat down on the floor to talk to the protesters, according to mainland media. Du, who looked exhausted, said it was difficult for Evergrande to discharge guarantee obligations of all its matured wealth products, which were worth a total of 40 billion yuan, at one go.
Prior to this, Evergrande’s wealth management division had proposed last week that its customers could choose to get back their money in installments, could buy Evergrande’s properties or could offset their mortgage loans.
On September 10, Evergrande’s chairman and founder Hui Ka-yan said in an internal meeting that all department heads had to ensure the smooth operations of property construction and sales as it would help the company pay back its wealth customers.
“I can own nothing, but Evergrande’s wealth customers cannot own nothing,” Hui said, adding that the redemption system would be fair and just.
Over the past few months, the Shenzhen-based property developer’s contract sales have been declining month on month.
In August, the company’s contracted sales fell to 38.08 billion yuan, including the amounts offset through the sales of property units to suppliers and contractors, which were down 26% from 51.48 billion yuan in the same period of 2020. Contracted sales fell 13% year-on-year to 43.78 billion yuan in July and declined 5.8% year-on-year to 71.63 billion yuan in June.
“The ongoing negative media reports concerning Evergrande have dampened the confidence of potential property purchasers in the company,” Hui said in the latest stock exchange filing on Tuesday. “The company expects a significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by it which would in turn place tremendous pressure on its cash flow and liquidity.”
The company also said there had not been any material progress on sales of China Evergrande New Energy Vehicle Group and Evergrande Property Services Group. It said it remained uncertain as to whether it would be able to consummate any such sale. Besides, the disposal of its office building in Hong Kong has not been completed within the expected timetable. As of Tuesday, no legally binding agreement has been entered into by the company with any investor or any purchaser for such disposal.
Prior to this, media reports said Yuexiu Property Co Ltd had started taking over China Evergrande Centre, located at 38 Gloucester Road, Wan Chai, while Guangzhou City Construction Investment Group had already acquired Evergrande’s football court and related properties in Guangzhou.
The company said it was in active discussion with the issuers and investors of its wealth management products with a view to reaching a mutually agreeable repayment arrangement.
“In view of the difficulties, challenges and uncertainties in improving its liquidity, there is no guarantee that the company will be able to meet its financial obligations under the relevant financing documents and other contracts,” it said.
It said if it was unable to meet its guarantee obligation or to repay any debt when due or agree with the relevant creditors on extensions of such debts or alternative agreements, it could lead to cross-default under its existing financing arrangements and relevant creditors demanding the acceleration of repayment. Evergrande said this would have a material adverse effect on its business, prospects, financial condition and results of operations.
Evergrande said offshore creditors could contact its newly hired financial advisers Houlihan Lokey (China) Ltd and Admiralty Harbour Capital Ltd.
Andrew Lam, Director and Head of Business Development & Marketing at BDO Hong Kong, which is an accounting firm, said an appointment of financial advisers could signal that a company was in financial difficulty but did not necessarily mean that it would go bankrupt. Lam said if other liquidity problems such as loan defaults, failures to receive cash from business partners or bond rating downgrades were reported at the same time, a company would face a higher risk of bankruptcy.
On September 7, Moody’s downgraded the corporate family rating (CFR) of Evergrande from “Caa1” to “Ca” and the developer’s senior unsecured ratings from “Caa2” to “C.” According to Moody’s ratings, “Ca” refers to “default imminent with little prospect for recovery” while “C” refers to “in default.”
On September 8, Fitch Ratings said it too had downgraded the long-term foreign-currency issuer default ratings (IDR) of China Evergrande Group and its subsidiaries Hengda Real Estate Group and Tianji Holding Limited, from “CCC+” to “CC.” According to Fitch’s ratings, “CC” refers to “default imminent with little prospect for recovery.”