(Bloomberg) -- China Evergrande Group is facing a crisis of confidence among creditors who’ve lent the world’s most indebted developer more than $120 billion.Long-simmering doubts about the property giant’s financial health exploded to the fore on Thursday, following reports it had sent a letter to Chinese officials warning of a potential cash crunch that could pose systemic risks. The news sparked a bondholder exodus that continued into Friday, sending the price of Evergrande’s yuan note due 2023 down as much as 28% to a record low. Losses in the company’s dollar bonds spread to high-yield debt across Asia.Evergrande said in a statement that rumors and documents circulating online were “fabricated” and “pure defamation,” without commenting directly on whether it had warned officials of a potential cash crunch. The developer, controlled by billionaire Hui Ka Yan, said it generated 400 billion yuan from project sales in the first eight months and maintains healthy operations. Evergrande won approval from Hong Kong’s stock exchange to spin off its property management unit, it said on Friday, paving the way for it to raise much-needed capital.That did little to buoy investor sentiment, however, with Evergrande shares falling 9.5% to the lowest level since May at the close of trading in Hong Kong.The market’s biggest near-term worry relates to an agreement Evergrande struck with some of its largest investors. It gives them the right to demand their money back if the company fails to win approval for a backdoor listing on the Shenzhen stock exchange by Jan. 31. The repayment could amount to 130 billion yuan ($19 billion), or about 92% of Evergrande’s cash and cash equivalents. At least one of the investors has signaled it would be unwilling to extend the deadline.Asia’s Junk Bond Giant Is Threatening Already Fragile MarketIn another sign of mounting concern among creditors, at least five Chinese banks and two trust firms held emergency meetings on Thursday night to discuss their Evergrande exposure and access to collateral, people familiar with the matter said. Among them was China Minsheng Banking Corp., whose exposure to Evergrande exceeds 29 billion yuan, one of the people said. Minsheng Bank declined to comment.At least two of the banks that convened meetings on Evergrande decided to bar the company from drawing unused credit lines, according to people familiar. The developer had credit lines of 503 billion yuan as of June 30, of which 302 billion yuan were unused.“Regardless of the authenticity of the letter, we think the situation may have prolonged negative impact,” Manjesh Verma and Stella Li, credit analysts at Citigroup Inc., wrote in a report. “It increases concerns among various investors and lenders and hence increases difficulty in funding access and refinancing.”Evergrande has long been viewed as a poster child for highly leveraged companies in China, where corporate debt swelled to a record 205% of gross domestic product in 2019 and has likely climbed further this year as firms increased borrowing to tide themselves over during the pandemic. Evergrande has tapped banks, shadow lenders and the bond market in recent years to expand beyond the property industry into businesses ranging from electric cars to hospitals and theme parks –- areas that often align with Chinese President Xi Jinping’s policy priorities.Though it’s unclear why Evergrande has yet to win approval for its listing plan, some analysts have speculated it may relate to China’s efforts to tame sky-high home prices and restrain fundraising by developers. Regulators have been using a wide range of policy levers since 2016 to deter speculative home-buyers, curb expensive land prices and restrict lending to residential builders.Evergrande has said it won’t raise new funds through the listing in Shenzhen, but the transaction could allow the company to achieve a higher valuation and thus easier access to future financing. Its stake sale to strategic investors in 2017 implied a valuation of about 425 billion yuan for the unit, which holds most of Evergrande’s real estate assets. That’s almost three times higher than the market value suggested by the developer’s existing shares in Hong Kong. Chinese property developers trade at about 12 times projected earnings on average in Shanghai and Shenzhen, compared with about 5 times in Hong Kong.One big unanswered question surrounding Evergrande is whether authorities would step in to support the developer if it struggles to repay creditors. While the Chinese government has a long history of bailing out systemically important companies to maintain financial stability, policy makers have in recent years sought to instil more market discipline and reduce moral hazard.As part of efforts to rein in financial risk, authorities have taken control of indebted conglomerates including HNA Group Co., Anbang Insurance Group Co. and Tomorrow Group. They’ve also introduced new rules for financial holding companies, including Evergrande, that impose minimum capital requirements and other restrictions meant to reduce the threat of systemic blowups.S&P Global Inc. cut its outlook on Evergrande’s B+ credit rating to negative from stable on Thursday, but downplayed the threat of a liquidity crunch. The ratings company noted that Evergrande is trying to convince strategic investors to stay put and is an “asset-rich” company with multiple fundraising channels.Evergrande has vowed to increase sales as part of its effort to meet an aggressive deleveraging target -- cutting borrowings by about 150 billion yuan each year from 2020 to 2022, or about half its current debt load.But the company has so far fallen short of the pledge. Evergrande’s total debt rose 4% in the first half to 835 billion yuan, while short-term debt was almost triple cash, equivalents and short-term investments combined, data compiled by Bloomberg show.Here are some of the biggest Evergrande-related market moves on Friday:China Evergrande New Energy Vehicle lost 13%; Chinese Estates Holdings Ltd., which owns about 860 million Evergrande shares, slumped 4.5%Other property developers also sank; Sunac China Holdings fell 5.2%; Jinke Properties lost 4.8%Evergrande’s dollar notes were the five worst performers on a Bloomberg Barclays index of Asian dollar bonds; the company’s dollar bond due 2025 slumped 4 cents on the dollar to 72.1 cents, the lowest level since early AprilSome of Evergrande’s domestic bonds hit record lows with sharp declines temporarily triggering trading halts; Its yuan bond due 2022 fell 18% to 77.7 yuan; bond due 2024 dropped 30% to 65.9 yuan(Updates with confirmation of property management unit spinoff approval in 3rd para)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- China Evergrande Group won approval from the Hong Kong Stock Exchange to spin off its property management unit, it said in an exchange filing on Friday, paving the way for the company to raise much needed capital.Evergrande could seek to raise $1 billion to $2 billion from the offering, depending on market conditions, people familiar with the matter said, who asked not to be identified because the information is private. The developer said it will shortly submit a formal application for listing the property management unit.The unit, recently valued at $11 billion in a stake sale to strategic investors, could help replenish the indebted developer’s finances. This comes at a time strategic investors have the right to demand the company pay them $19 billion in January if it can’t complete a targeted listing in China. The stock plunged for a second-day Friday after Bloomberg News yesterday reported the developer had sought government help to avoid a cash crunch.Read more: Evergrande Warns of Looming Cash Crunch, Spooking Investors Chinese property developers have been seizing on a market rally to list their service arms and raise money to pare debt. Hong Kong-listed Evergrande needs the exchange’s approval for the restructuring.Unlike real estate assets that face government curbs and cyclical downturns, the property management units offer a stable business model with recurring fee revenue and low leverage. Investor demand has also prompted some of these companies to demand valuations loftier than Kweichow Moutai Co., the spirits maker that’s one of China’s most loved stocks.Evergrande raised HK$23.5 billion ($3 billion) by selling a 28.1% stake in its property management arm to investors including Tencent Holdings Ltd. in August. Companies linked to Citic Capital Holdings, the wife of billionaire mogul Joseph Lau and the family investment arm of New World Development Co. billionaire Henry Cheng were among the cornerstone investors.Other investors include Yunfeng Capital, the fund backed by Chinese e-commerce billionaire Jack Ma, and Sequoia Capital, people familiar said.Read more: The Billionaire Club Behind China’s Most Indebted Developer The proceeds from the pre-IPO fundraising may allow Evergrande to reduce its net debt to equity, a key measure of leverage, to 153% from 159% at the end of last year, according to Bloomberg Intelligence.(Updates with official confirmation in paras 1 and 2)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- The world’s most indebted developer has warned Chinese officials it faces a potential default that could roil the nation’s $50 trillion financial system unless regulators approve the company’s long-delayed stock exchange listing. Shares and bonds fell in volatile trading.China Evergrande Group mapped out the scenario in an Aug. 24 letter to the Guangdong government seen by Bloomberg, in which the company sought support for a restructuring proposal needed to secure the listing and avert a cash crunch.Some of Evergrande’s biggest strategic investors have the right to demand their money back if the company fails to win approval for a backdoor listing on the Shenzhen stock exchange by Jan. 31. If investors refuse to extend the deadline, Evergrande will need to repay as much as 130 billion yuan ($19 billion), equivalent to 92% of its cash and cash equivalents.That may lead to “cross defaults” in Evergrande’s borrowings from banks, trusts, funds and the bond market, eventually leading to systematic risks for the broader financial system, according to the letter sent to the provincial government of Guangdong, where the company is based.Calls to the media office of the Guangdong government on Thursday went unanswered.Evergrande shares posted volatile swings in Hong Kong trading, as investors remain divided on whether it will be able to meet the listing deadline. It fell 4.3% as of 11:47 a.m., reversing earlier gains. Evergrande’s domestic notes due in 2023 fell to a record low of 85.1 yuan, according to prices compiled by Bloomberg. Its seven-year bond halted trading in Shanghai.Evergrande said in a statement that online social media posts about its asset restructuring plans are “made up” without specifying details.“The relevant documents and pictures are fabricated and are pure defamation, causing serious damage to the company’s reputation,” Evergrande said in the statement. “The company strongly condemns such acts and has reported the case to the public security authorities. The company will take all legal actions to protect the legitimate rights and interests of the company.”It added that the firm generated 400 billion yuan of cash inflows from project sales in the first eight months and maintains healthy operations. It didn’t address questions on whether it sought help from the government.S&P Global cut its outlook on Evergrande’s B+ credit rating to negative from stable on Thursday.“We believe China Evergrande Group’s liquidity is weakening amid the continual increase in short-term debt obligations and potential repayment of a portion of its China domestic ‘A-share’ strategic investments in January 2021,” S&P said.Still, the ratings company downplayed the risk of a liquidity crunch, noting that Evergrande is trying to convince strategic investors to stay put and is an “asset-rich” company with multiple fundraising channels. Evergrande’s sales will likely remain steady in 2020, S&P said.Chinese policy makers have a long history of supporting systemically important companies to maintain financial stability. While the government has sought to instill more market discipline and reduce moral hazard in recent years, authorities bailed out several troubled regional lenders in 2019 and have helped engineer at least six bank mergers since May.Property BellwetherEvergrande is viewed by investors as a bellwether for China’s highly leveraged property sector. The company’s total debt edged up 4% to 835 billion yuan at the end of June, compared with 800 billion yuan at the end of 2019. Net debt swelled to a record 631 billion yuan on a weaker cash buffer, Bloomberg calculations show.Evergrande in August reiterated an aggressive deleveraging target -- cutting borrowings by about 150 billion yuan each year from 2020 to 2022, or about half its current debt load. But so far it’s fallen short of the pledge.The company has since launched a nationwide sales blitz to recoup cash, raised $3 billion by selling a stake in its service arm and reduced spending on land purchases. It expects total investment on electric vehicles to be 29 billion yuan, lower than 45 billion yuan planned earlier.(Updates with shares and bonds in sixth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.