The Evergrande Group’s debt crisis has entered its final stage after the Chinese property developer’s plan to sell its property service unit was scrapped and with the 30-day grace period for coupon payment on its US dollar bonds is set to expire on Saturday.
The Shenzhen-based property firm originally planned to sell a 50.1% stake in Evergrande Property Services Group to Hopson Development Holdings but the transaction was not completed. Hopson said it was seeking ways to complete the deal and would explore options to protect its legitimate interests if Evergrande terminated the negotiation unilaterally.
Meanwhile, top Chinese officials have expressed confidence that the broad property sector is sound and that Evergrande’s problems won’t spill over into a banking crisis.
Contrary to the expectations of many Western analysts, the People’s Bank of China (PBoC) has not loosened monetary policy in response to Evergrande’s crisis and debt troubles at several other Chinese property developers.
Rather, the PBoC is treating the Evergrande crisis as a microeconomic problem rather than as a macroeconomic challenge.
Vice Premier Liu He told a Beijing financial conference on Wednesday that “reasonable capital needs are being satisfied and the big trend of a healthily developing property market won’t change,” the government-run Global Times reported.
PBoC Governor Yi Gang told the same conference that the “spillover of the Evergrande incident is under control” and that “the legitimate rights and interests of creditors and property owners, particularly homebuyers, will be fully respected,” Global Times added.
Most of the big Chinese property developers’ shares rallied sharply in Hong Kong after Liu He’s remarks, with Sunac China holdings up 10%, Longfor Group up 7.6%, and Chinese Overseas Land and Investment up 5%.
Media reports said Evergrande had continued to pay interest to its domestic bondholders but so far remained silent on its dollar debt obligations.
Evergrande has faced a shortage of liquidity since its plan to go public in Shanghai was scrapped last year.
Chinese financial regulators also announced “three red lines” to forbid heavily indebted property developers to borrow money from banks before they lowered their gearing ratios. In the first half of this year, Evergrande reported lower-than-expected contracted sales, which worsened its financial situation.
On September 23 and 29, Evergrande failed to pay interest of US$83.5 million and $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 October 11, it was again unable to pay $148 million in interest to its bond investors. If it fails to deliver coupon payments by Saturday, it will be forced by creditors to liquidate its assets.
Evergrande has tried to replenish its foreign exchange by offering to sell its Hong Kong headquarters building in Wan Chai district to Chinese state-owned Yuexiu Property for $1.7 billion. However, Yuexiu Property pulled out of the deal last week, fearing that Evergrande’s debt problems would complicate the transaction.
On October 4, trading of Evergrande shares was suspended pending an announcement about a major transaction. On Thursday, Evergrande said in a filing to the Stock Exchange of Hong Kong that on October 12 it had reason to believe that Hopson Development had not met the prerequisite to make a general offer for shares in Evergrande Property Services.
It said its assessment was based on information from sources other than the Securities and Futures Commission. Evergrande said it exercised its right to terminate the proposed deal on October 13.
Hopson Development said Evergrande should have sold the stake in Evergrande Property Services for HK$20 billion (US$2.57 billion) on October 12 but the deal was not completed. It said until now it was prepared to complete the deal while it was exploring available options to protect its interests.
On Thursday, trading of both Evergrande’s and Hopson’s shares resumed. Shares of Evergrande fell 12.5% to close at HK$2.58 while Evergrande Property Services’ shares dipped 8.01% to HK$4.71. Shares of Hopson surged 7.57% to HK$26.6.
Contagion has spread to certain other Chinese property developers, triggered by the distress of Evergrande and aggravated by subsequent credit events involving other developers, according to a research report published by Fitch Ratings on Thursday.
The resulting market volatility has weakened near-term refinancing prospects and exacerbated liquidity strains for property developers with weaker credit profiles and those more reliant on capital-market debt financing, even as spillovers to investment-grade issuers and the broader corporate sector have so far been limited, Fitch said.
PBoC Governor Yi said on Wednesday that the major risks Evergrande was facing included its outstanding coupon payments, the suspension of its property construction and the uncertainty surrounding its delivery of apartments to its homebuyers.
Yi said Evergrande’s debt crisis was an individual case but financial regulators had to prevent the risks from spreading to other property developers or China’s banking sector.
Yi also said Evergrande’s total liability amounted to $300 billion, one-third of which is financial debt owned by diversified creditors with collateral. He said the spillover effect of the Evergrande crisis remained manageable.
The governor added that Evergrande should strictly follow the legal requirements to compensate its creditors and fully respect and protect the legal rights of creditors and stakeholders. He said during the process Evergrande should protect homebuyers’ rights. Yi also said the company had to control its risks within a certain amount and avoid triggering any systemic risks.
Vice Premier Liu said in a written speech in a forum on Wednesday that some particular problems had arisen in the country’s property markets but the overall risks are under control. Liu said reasonable capital demands in the property markets had been satisfied while the healthy growth of the overall markets would continue.
Senior Chinese monetary officials told Asia Times earlier this month that the market shakeout would help lower home prices in some overheated Chinese markets, contributing to Beijing’s “common prosperity” objective, and help contain inflation by reducing prices for raw materials.