As China Evergrande Group (3333.HK) faced a series of challenges over the past two years, the Beijing government refrained from intervening directly, despite the company once being perceived as too integral to the nation’s economy to collapse. Currently, as China’s most heavily indebted developer teeters on the brink of disaster, particularly after a criminal investigation into its billionaire founder, numerous stakeholders are speculating whether the authorities will now step in.
The potential disintegration of this massive property firm could send shockwaves through China’s fragile economy. It would mean hundreds of thousands of homes remaining incomplete and approximately $300 billion in domestic liabilities.
Despite witnessing several property developers in China defaulting on their debts post a 2021 liquidity crisis, Beijing hasn’t initiated a direct rescue for any firm. Evergrande’s potential for survival, encompassing its offshore debt restructuring strategy and general business health, has been overshadowed by the investigation into its founder, Hui Ka Yan.
The investigation seems to indicate the central government’s rejection of debt restructuring attempts led by Hui. Xin Sun, a senior lecturer at King’s College London, stated that the scrutiny into Hui signifies the government’s prioritization of political matters over economic concerns regarding Evergrande. He added, “From a political stance, the state must ensure that Evergrande and its owners are held accountable for igniting China’s real estate crisis. Any restructuring must occur only after this responsibility is acknowledged.”
Evergrande holds contract liabilities, which are advance payments from homebuyers, amounting to 604 billion yuan (equivalent to $83 billion). This translates to roughly 600,000 housing units, as per a Gavekal Dragonomics report.
In light of the growing number of unfinished properties nationwide, which led to an unprecedented wave of collective dissatisfaction in June the previous year, Beijing has emphasized the completion and handover of houses. Christopher Beddor, from Gavekal Dragonomics, noted that regarding Evergrande, the government’s main concern would undeniably be delivering the unsold and unfinished homes. He further added, “It’s not necessary for a formal takeover by the government or a state-owned entity to heavily influence the firm’s decisions, potentially steering the entire industry towards state ownership.”
Requests for comments from Evergrande and the Chinese housing authority during the National Day holiday week went unanswered.
On the topic of Evergrande’s restructuring, even before the public became aware of the investigation into Hui, the company’s debt restructuring roadmap became uncertain. This uncertainty was due to the disclosure that it couldn’t issue new debt because of an ongoing probe into its chief China-based division. Furthermore, the company also expressed that it might need to reconsider the proposed restructuring’s terms as home sales projections weren’t being met.
Sandra Chow of CreditSights mentioned the pivotal role of issuing new notes for any restructuring. Gavekal’s report highlighted that achieving an orderly restructuring for Evergrande is increasingly becoming a challenging task. Moreover, a liquidation petition against Evergrande is set for a hearing in a Hong Kong court at the end of October.
A source close to Evergrande shared that while the debt restructuring might face delays, it could progress under the guidance of a government-instituted risk management committee. It’s worth noting that in December 2021, amid the intensifying liquidity crisis at Evergrande, a risk-management committee was established. This committee, comprising officials from state-owned entities, was meant to guide debt and asset restructuring.
An anonymous Evergrande bondholder, however, suggested that the probe into Hui might thwart restructuring endeavors. They hinted at the possibility of Evergrande facing liquidation, even with government intervention.
Yet, there’s no definitive roadmap for what could be one of the largest global liquidation exercises. This uncertainty extends to the fate of creditors, especially international ones, suppliers, and homebuyers awaiting their properties.
By June’s end, Evergrande’s total liabilities were valued at $327 billion. The company has been trying to get creditors on board for restructuring its offshore debt, which stands at $31.7 billion. This encompasses bonds, collateral, and repurchase responsibilities.
Considering the enormous debt, deteriorating cash flow, and the vast number of incomplete homes, some analysts are pondering whether Evergrande has transitioned from being “too big to fail” to “too complicated to exist”.
Antonio Fatas, a professor at INSEAD, remarked that Evergrande’s size mandates a managed collapse. He elaborated that due to China’s political and economic framework, coupled with substantial government and state-owned company involvement, there will inevitably be a political discourse regarding loss distribution for such incidents.
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