Evergrande’s Restructuring Plan Is Stalling in China.
The real estate developer has not been able to present the promised plan to its creditors by the end of July 2022.
It's still a big blur for Evergrande's international creditors. The Chinese real estate behemoth had pledged to present a “preliminary restructuring plan” by the end of July 2022, but instead, its creditors had to settle for a terse update referring to “preliminary restructuring principles”.
The Chinese developer, crushed by a mountain of debt estimated at around $300 billion, remained vague on how its international creditors - to whom it owes $20 billion - could hope to recover some of their stakes. At most, he mentioned a contribution from its assets located outside China, including its interests in its listed subsidiaries specializing in property management (Evergrande Property Services) and the production of electric vehicles (China Evergrande New Energy Vehicle).
The detailed plan will wait until the end of 2022, at best …
“The market is having trouble believing it, Evergrande has already lost a lot of credibilities while its financial problems have lasted for more than a year,” recalls Xiadong Bao of Edmond de Rothschild AM, referring to the first warnings launched about the Chinese developer. The deficit of confidence in the group is immense, especially after the ouster of the boss and his financial director in mid-July 2022 following an internal investigation into the fraudulent use of 13.4 billion yuan belonging to a subsidiary as collateral to obtain bank loans.
The expectations of Evergrande's creditors appear limited. On the financial markets, the dollar debt of the troubled Chinese giant is trading at less than 10% of par. The developer's share price has been suspended on the Hong Kong Stock Exchange since March 2022. The developer's off-balance sheet commitments are being revealed in dribs and drabs, as legal proceedings unfold. An arbitration court recently ordered one of its subsidiaries to pay $1.1 billion, which will require the sale of a stake in a local bank.
Market volatility
Beyond the specific case of Evergrande, investors remain cautious about the slump in the Chinese real estate market. Sales of the country's top 100 developers fell nearly 40% year-on-year in July 2022, according to China Real Estate Information. “Overall market demand and purchasing power have been depleted, while industry confidence is also low,” the group noted in its report. “Developers are still facing strong destocking pressure in the short term,” it added.
Admittedly, the drop is slightly less severe than in June 2022 (-43%), but the recovery is slow. Investors are also concerned about the refusal of some homeowners to pay their mortgages in the face of stalled construction. The government has recently made several statements in support of the sector in an attempt to reassure the markets, as real estate and construction account for more than a quarter of the country's GDP. On Monday, the People's Bank of China again pledged to ensure stable financing for the sector and “reasonably ample” liquidity.
The task of the authorities is arduous, but there has been a change in tone from Beijing. “The government is trying to avoid moral hazard and does not want to encourage risk-taking in the sector again,” says Xiadong Bao. After all, the current crisis is the consequence of limits on the sector's indebtedness put in place by Beijing over a year ago. “Support measures exist, but they are often proportionate, on a case-by-case basis,” he adds.
Faced with market volatility and uncertainty about the government's plans, the manager limits his investments to the strongest promoters with the healthiest balance sheets. He prefers companies directly linked to the Chinese government, which could benefit from its support in case of difficulties. But there is no guarantee that Beijing will rush to the rescue of these companies. Faced with the deterioration of the real estate market, the rating agency Moody placed the securities of the developer Sino-Ocean in speculative grade on Monday, even though the company has the state-owned group China Life as its main shareholder.
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