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Chinese property giant will reveal how it will restructure its $300bn debt by July, amid confusion about how banks seized $2bn from one its divisions
China Evergrande Group has blamed a “drastic change” in the company’s prospects for a delay to publishing its annual results but has promised investors that it will reveal how it plans to restructure its massive debts of $300bn by the end of July.
Evergrande, which has been kept alive by government-run rescue operation since it defaulted on $22.7bn worth of overseas debts in December, said audit work would not be completed by the 31 March deadline. It promised to “further enhance communications” with investors.
The turmoil at the stricken company was underlined when it also announced its property services unit had discovered a $2bn hole in its accounts.
Evergrande said it had launched an investigation into how banks had seized the cash, which had apparently been pledged as security for third party guarantees without the property services unit’s knowledge. It described the problem as a “major incident”.
The seizure of the funds, which the property services unit discovered when it was preparing its annual report, underscores the turmoil at Evergrande and has baffled investors, who had seen Evergrande Property Services as one of the better-run divisions of the sprawling empire built by former steel executive Xu Jiayin.
Andrew Chan, an analyst at Bloomberg Intelligence, said: “It’s peculiar because investors expect Evergrande management should be aware of where the cash went rather than instead setting up an investigation committee to find out.”
It will also increase fears among foreign creditors that they will never see their money.
Tim Symes, insolvency and asset recovery partner at the international law firm Stewarts, said the seizure of the cash by local banks would have repercussions for confidence in investing in China.
“This significant development will feed the concerns by international bondholders that their interests will be subordinated by domestic interests,” he said. “What doesn’t help is the lack of information coming out to the international bondholders, hampering the ability to report to investors on the present situation and the likely fate of the bonds. This situation has wider consequences that may ultimately affect future decisions on investment in Chinese company bonds.”
Several other major property developers, including Hopson Development Holdings and Ronshine, have delayed their results or seen their auditors resign amid concern that the annual reporting season will reveal more weaknesses in China’s giant real estate sector.
Kaisa Group Holdings became the latest to say it would unable to publish audited earnings for 2021 by the end of March when it said late on Tuesday that a Covid lockdown in Shenzhen left audit work incomplete. Its stock price dropped 2.7% on Wednesday
Other major developers including Sunac China Holdings and Shimao Group Holdings also this week said they will delay reporting audited results due to disruption caused by Covid-19.
Evergrande, once China’s top-selling developer and now reeling under more than $300bn in liabilities, defaulted on overseas bond payments in December and has struggled to repay suppliers and creditors, and complete projects and homes.
Shares in Evergrande and other Chinese property companies soared last week thanks to an announcement by vice premier Liu He that the government in Beijing would be urging the rollout of market-friendly policies to support the economy.
But the debt crisis in the industry – brought on intially by a Beijing-led crackdown on reckless lending – continues to worsen. On the same day as Liu made his speech last week, China’s third-biggest property developer, Sunac, was downgraded by the credit agency S&P because of concerns that it might not be able to meet its huge debt repayments of nearly $4bn due this year.
Investors have been left hanging on for more information from Evergrande after it announced in January that it aimed to have a preliminary restructuring proposal in place within six months.
The developer set up a risk management committee in December made up mostly of members from state enterprises, as the Guangdong provincial government is leading the restructuring.
“With the broad support and understanding from the majority of creditors … we strive to release the preliminary restructuring proposal by the end of July,” Chen Yong, a member of the committee, told investors on Tuesday.
As part of its plans to divest assets to repay some of its offshore debt, the developer is working to sell its Yuen Long land parcel in Hong Kong as well as the Evergrande Centre commercial building, said Evergrande board member Liang Senlin.
Trading in shares of Evergrande, its property services unit Evergrande Property Services Group Ltd, and electric vehicle unit China Evergrande New Energy Vehicle Group Ltd have been suspended since Monday.
Liang said on the investor call the developer was trying to draft in strategic investors in both the electric vehicle and property services units to restore value – a goal it has been pursuing for roughly a year without much success.
Siu said the EV unit aimed to start mass production in June of its inaugural electric car, the Hengchi 5 sport-utility vehicle, after getting approval to start sales last week. Some of the investors who attended the call were not impressed with the assurances from management.
“They mainly explained why the trading of stocks is suspended. There was no new information and the situation remained the same,” said a bondholder who was on the call, declining to be named as he was not authorised to speak to the media.