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Evergrande hires restructuring advisers as Chinese property fears mount

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An Evergrande development in Beijing
An Evergrande development in Beijing

Evergrande, the Chinese property giant, has hired restructuring advisers in a move that sent shares in rivals falling on fears of further defaults in the debt-laden sector.

The company said it has appointed US restructuring experts Houlihan Lokey, which has advised on the bankruptcies of Enron, Lehman Brothers and China’s Luckin Coffee, and Hong Kong investment bank Admiralty Harbour Capital.

The pair will “explore all feasible solutions to ease the current liquidity issue and reach an optimal solution for all stakeholders as soon as possible”, Evergrande said in a filing to the Hong Kong stock exchange.

The appointments mark a U-turn for the company, whose $300bn debt mountain is the biggest among China’s property developers. On Monday it denied imminent bankruptcy and said online comments about a restructuring were “completely false”.

Beijing is also putting together a group of accounting and legal experts to examine the group’s finances, Bloomberg reported.

Pressure on Evergrande has been rising in recent days, with videos on social media showing protests by property buyers and retail investors demanding their money. State media reported that hundreds were arrested at Evergrande’s headquarters in Shenzhen.

Some 1.5m people have invested in the company’s apartments, some of which are yet to be built. Evergrande, founded in 1966 by billionaire Xu Jiayin, relies heavily on customers who pay for properties before projects are completed. At least two credit rating agencies have downgraded the group.

Shares of the Hong Kong-listed giant fell almost 12pc on Tuesday to their lowest price since 2014, pulling rivals down with it. China Vanke, the country’s largest developer by market share, fell more than 5pc.

Security personnel guard Evergrande's headquarters in Shenzhen against protesters
Security personnel guard Evergrande's headquarters in Shenzhen against protesters

Moves were mirrored by fellow property giants including Sunac and Country Garden as concern rises that Evergrande’s liquidity crisis could spill over into the broader sector.

“The size of Evergrande’s liabilities means that there is no precedent playbook that can be used for guidance,” said Justin Tang, head of Asian Research at investment adviser United First Partners.

“There is a palpable fear of a contagion and the CCP [Chinese Communist Party] will have to call on every ounce of their intellect, political will and financial wherewithal to ensure minimal social and economic fallout.”

On Tuesday Evergrande also revealed monthly sales have already begun to fall, almost halving from 71.6bn yuan to 38.1bn between June and August.

It warned of “significant continuing” declines in sales in September - a typically strong month for property developers in China.

The home builder, which had last month warned of the risk of default, blamed collapsing sales on “ongoing negative media reports” that have “dampened the confidence of potential buyers”.

Evergrande’s fall follows the boom of a private property sector in China, fuelled by strong demand - which has pushed house prices to 18 times the average income - and Beijing often turning to property investment as a short-term boost to growth.

“Evergrande is also only the tip of the iceberg when it comes to potential property sector defaults,” said Tianchen Xu, economist at the Economist Intelligence Unit in China.

“Property firms’ overseas debt repayments will peak in 2022, and they will also face a large amount of repayments on loans due to domestic banks, trust liabilities and payable that year.”

Intervention by Beijing is expected to avoid spillover into the residential and credit markets. Some industry insiders predict that protests may even speed up government involvement.

“[The government] will not allow the company’s default to spread into the banking system. The authorities are likely to ultimately act as a broker for Evergrande, and direct several large state-owned enterprises to restructure the business,” said Mr Xu.

“However, the debt restructuring will leave out the smaller firms that make up Evergrande’s supply chain, many of whom Evergrande used for financing. These smaller firms will likely collapse.”