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Moody's -- Evergrande's lax covenants worsen offshore bondholders' woes

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·10 min read
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Research Announcement:

Moody's -- Evergrande's lax covenants

worsen offshore bondholders' woes

Singapore, January 26, 2022 --

» Covenant protections of Evergrande’s bonds against known structural subordination risk have

loosened or been eliminated to the detriment of offshore bondholders

» Evergrande's weakened covenants have endangered debt servicing and further subordinated

offshore bonds

Covenant packages in China Evergrande Group’s (Evergrande, Ca negative) offshore issuances

have become increasingly lax, loosening or eliminating key protections, according to Moody’s

Investors Service in a new report. At the same time, recovery prospects for offshore bondholders are

in peril given they rank behind the creditors of Evergrande’s over 1,950 onshore subsidiaries, none

of which guarantee the offshore bonds.
“Evergrande’s lax bond covenants have given it materially greater flexibility to conduct its business

without answering to the offshore bondholders. Indeed, flexible covenants have left Evergrande and

other Chinese property developers with a corporate family rating of B3 negative and below (B3N

developers) vulnerable to the highly cyclical nature of China's real estate market,” says Jake Avayou,

a Moody’s Vice President and Senior Covenant Officer.
Loosening or removing the protective features of Evergrande's debt covenant has allowed the

company to increase leverage materially, impairing its ability to service its debt and further

subordinating the offshore bonds. Such features included a cap on onshore subsidiary debt

incurrence under the $1 debt test, which for Evergrande increased to 25% of total assets in its bonds

issued in 2020, from 15% in its bonds issued in 2011.
Meanwhile, Evergrande's debt carve-outs have tripled in size from 2011 to 2020; meaning the

company has been able to incur material debt without breaching its debt covenant. Debt carve-outs

for most of the other B3N developers have also grown, allowing them to incur substantial debt even

if they were unable to satisfy the $1 debt test.
Larger permitted investments and the removal of a line of business covenant allowed Evergrande

to invest heavily in non-property businesses. Such a removal in its bond issued in 2015 made it

easier for Evergrande to invest in non-core businesses such as new energy vehicle and financial

businesses.
What’s more, Evergrande paid sizable dividend payments of about RMB96 billion from 2016 to 2020

at the expense of cash preservation. Evergrande’s earlier bonds only allowed it to pay dividends

if it satisfied the $1 debt test, but it started to include an exception in 2015 that allowed it to pay

dividends without having to satisfy the $1 debt test. All but one of the other B3N developers have

done the same.
Subscribers can access the report at:

http://www.moodys.com/researchdocumentcontentpage.aspx?

docid=PBC_1309860

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NOTE TO JOURNALISTS ONLY: For more information, please call one of our global

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This publication does not announce a credit rating action. For any credit ratings referenced in this

publication, please see the ratings tab on the issuer/entity page on

www.moodys.com

for the most

updated credit rating action information and rating history.
Jake Avayou

VP-Senior Covenant Officer

Corporate Finance Group

Moody's Investors Service Singapore Pte. Ltd.

JOURNALISTS: 852 3758 1350

Client Service: 852 3551 3077
Laura Acres

MD-Regional Corporate Finance

Corporate Finance Group

Moody's Investors Service Singapore Pte. Ltd.

JOURNALISTS: 852 3758 1350

Client Service: 852 3551 3077
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Moody's Investors Service Singapore Pte. Ltd.

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