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Evergrande’s Top Creditors Are Reducing Loan, Bond Exposure

Bloomberg News
·4 mins read

(Bloomberg) -- Several of China Evergrande Group’s largest lenders are reducing their exposure to the debt-laden developer, underscoring persistent concerns about the company’s financial strength despite its recent deal with investors to avert a cash crunch.

China Minsheng Banking Corp., Evergrande’s biggest creditor, told branches to avoid new unsecured loans to the developer and reduce overall financing, including through the bond market, people familiar with the matter said, asking not to be identified discussing private information. The move comes amid increased scrutiny from regulators, who have urged Minsheng Bank to improve management of its Evergrande risks after some of the bank’s short-term loans lacked sufficient collateral, one of the people said.

At least three other major creditors -- including Agricultural Bank of China Ltd., China Zheshang Bank Co. and Industrial & Commercial Bank of China Ltd. -- have adopted similar policies that were in effect after Evergrande reached a deal with investors two weeks ago to avert $13 billion of repayments. Large state-owned lenders will only consider new financing for the developer if it’s linked to specific projects with ample collateral and risks that are segregated from Evergrande as a group, the people said.

Representatives at Minsheng Bank, AgBank, Zheshang Bank and ICBC said they couldn’t immediately comment.

Evergrande’s cooperation with financial institutions is normal and the company isn’t aware of banks cutting exposure, a representative said in a text reply to questions from Bloomberg. Evergrande isn’t aware of Minsheng Bank holding any of its bonds, the representative said.

Prices for Evergrande’s dollar notes dipped after Bloomberg’s report on Monday, with the company’s bond due 2025 falling 0.6 cent on the dollar to 77.1 cents. Shares dropped 1.3% in Hong Kong even as the benchmark Hang Seng Index gained 2.2%.

The world’s most indebted developer has become a major focus for international investors and Chinese regulators after last month’s liquidity scare. While Evergrande’s shares and bonds have rebounded from their lows, a more restrictive stance from China’s lenders could increase pressure on the developer as it tries to revive investor confidence. One of the company’s units is planning to sell about 2 billion yuan ($300 million) of five-year bonds this week, according to people familiar with the matter.

Read more: Evergrande Plans Return to Bond Market With 2 Billion Yuan Deal

The challenge for Evergrande’s billionaire founder, Hui Ka Yan, is to raise cash without resorting to a fire sale. The developer slashed apartment prices by as much as a third during China’s Golden Week holiday this month and is seeking to list its electric-vehicle and property-management units as part of a longstanding pledge to reduce leverage. It’s also sitting on one of the country’s largest portfolios of undeveloped land.

Evergrande has financed its sprawling business with a complex web of liabilities that includes $88 billion owed to banks, shadow lenders and individual investors across the country. The developer has also borrowed $35 billion from bondholders around the world and received down payments on yet-to-be-completed properties from more than 2 million homebuyers.

Trust companies, among the most important non-bank lenders to Evergrande, are also turning more cautious. One Zhejiang-based trust firm has imposed a new cap on loans to the developer and won’t roll over all its existing loans when they come due, one person said, adding that any new lending will require higher interest rates and depend on the quality of the underlying project.

Another trust firm decided not to work with Evergrande on any new products and will instead focus on ensuring existing products are repaid on time, one person said.

Evergrande has long been a subject of creditor angst, but worries about the developer surged to the fore last month after it sent a letter to provincial authorities warning of a looming cash crunch -- news of which dragged down its shares and bonds. The letter listed Minsheng Bank, AgBank, Zheshang Bank and ICBC as the developer’s biggest creditors. Minsheng Bank has more than 29 billion yuan of exposure to Evergrande, a person familiar with the matter said late last month.

While Evergrande has dismissed the concerns as based on rumors and “fabricated” documents, worries about its financial health were big enough that the Chinese cabinet and its financial stability committee, chaired by Vice Premier Liu He, discussed the risks posed by the developer last month.

Evergrande sealed a deal on Sept. 29 with a group of investors that waived their right to force repayments that had been tied to the company’s plan to gain a listing in China. But with at least $5.8 billion of bonds maturing in the next two months, analysts have said Evergrande still needs to drastically pare debt and sell assets or risk lurching back into another credit scare.

(Updates with Evergrande comment and markets from fifth paragraph.)

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