The heavily indebted Chinese property developer Evergrande Group failed to pay interest on three of its United States dollar bonds on Monday, increasing the risk that it will be forced to go bankrupt when the 30-day grace period ends on October 23.
Trading of Evergrande shares, together with those of its unit Evergrande Property Services Group, has been suspended in Hong Kong since October 4, pending an announcement about a major transaction.
Chinese media said Hopson Development, another key property developer in Guangdong province, was planning to purchase a 51% stake in Evergrande Property Services for more than HK$40 billion (US$5.1 billion). It has remained unclear when the deal will be completed and whether Evergrande will use the net proceeds to pay its bond investors.
Meanwhile, Evergrande’s former chief economist Ren Zeping said Monday that he had urged the management to reduce the company’s gearing ratio and stop starting new businesses such as the manufacturing of electric vehicles several years ago but his opinions were not listened to. Ren said he knew in the second half of 2020 that China’s “property era” had passed but it was beyond his expectation that Evergrande’s financial situation deteriorated rapidly this year.
Since Evergrande failed to get listed in the A-share market through a back-door listing last year, the Shenzhen-based company has faced cash flow problems. In the summer of 2020, the People’s Bank of China also launched “three red lines,” which require domestic banks to stop lending money to property developers with high gearing ratios, adding more financial pressure on Evergrande.
Although Evergrande offered homebuyers 30-40% discounts to boost sales and lower its gearing ratio this year, it still faced cash flow problems in the summer as property sales were slower than expected. It had to pay its contractors and workers with apartments. In early September, Evergrande’s wealth product investors protested in Shenzhen due to non-payment upon maturity.
On September 23 and 29, Evergrande failed to pay interest of US$83.5 million and US$45 million, respectively, to global investors who held its bonds. The company has a 30-day grace period to make payment before any default is officially reported. On Monday, it was again unable to pay US$148 million in interest to its bond investors.
Chinese media have previously reported that Evergrande was ordered by Beijing to first ensure the delivery of apartments to its homebuyers and the payments to its contractors and suppliers due to social stability concerns and then sell property projects and sites to pay onshore creditors. The company has so far remained silent on its dollar debt obligations.
As the company has entered a 30-day grace period since September 23, it has to deliver coupon payments by October 23, which is only 11 days from now, or it will be forced by creditors to liquidate its assets. Last Friday, advisers to offshore bondholders said they wanted more information and transparency from Evergrande, which has more than US$300 billion in liabilities.
Evergrande’s crisis also dragged down other Chinese property developers as they could not raise new funds through bond issuance overseas. On October 4, Fantasia Holdings Group, a Hong Kong-listed company, failed to repay a $205.7 million note. Property management firm Country Garden Services Holdings added that a unit of Fantasia had missed repayment on a 700 million yuan ($108 million) loan.
The company said Monday that two of its independent non-executive directors had resigned. Ho Man, one of the duo, expressed concern that he had not been kept fully informed of certain crucial matters of the company in a timely manner, according to a filing to the Hong Kong stock exchange.
Fantasia’s chairman Pan Jun said as the board of the company had no independent non-executive director possessing appropriate professional qualifications or accounting or related financial management expertise, it would make its best endeavors to identify suitable candidates to fill the vacancies as soon as practicable.
Last month, Liu Shengjun, an independent economist and the founder of China Financial Reform Institute, criticized Ren for making exaggerated public comments about the property market and misleading public investors and Evergrande’s management in recent years while getting paid 15 million yuan by the property developer annually.
On Monday, Ren, who resigned as chief economist at Evergrande and became the global chief strategy officer and vice chairman of Soochow Securities Hong Kong Financial Holdings in March, wrote an article to defend himself.
Ren said when he joined Evergrande in late 2017, the company’s gearing ratio had already surged to 86.25% and planned to diversify its businesses. He said he had raised concerns about the company’s potential financial risks in a research report published in 2018.
“Shortly after I joined Evergrande, I suggested to its key executives that the company reduce its debts and give up its business diversification plan,” Ren wrote. “According to the experiences of many local and foreign companies, most diversification plans failed.”
Ren said he opposed the company’s idea to invest in e-vehicle businesses but he was criticized by management during an internal meeting for failing to understand the company’s grand strategies and lacking long-term vision. He said he then moved to Beijing, focused on academic research and spent only a few days per month at Evergrande’s Shenzhen headquarter. He said he could not influence the management’s decisions as he was not asked to attend many meetings.
He said he had asked to leave the company a year ago as he saw that China’s property era had ended. He said he was told to stay by the company as he was a public figure and his resignation could affect Evergrande’s brand.
He said his resignation was approved in March this year but he did not respond to all public criticism against him until now as it was morally wrong to say anything negative when Evergrande was in financial turmoil. He also said some media had used his name to make bullish forecasts about China’s property markets.
However, Ren did not explain whether he had invested in Evergrande’s wealth products or he had successfully redeemed all his money.