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China's troubled property behemoth averts default, signals business shift

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By Reuters
Explainer-What's next for China Evergrande after missing coupon payments
Explainer-What's next for China Evergrande after missing coupon payments   -   Copyright  Thomson Reuters 2021   -  

<div> <p>By Clare Jim and Andrew Galbraith</p> <p><span class="caps">HONG</span> <span class="caps">KONG</span>/SHANGHAI – China Evergrande Group appeared to have averted default with a last-minute bond coupon payment, a source said on Friday, buying it another week to wrestle with a debt crisis looming over the world’s second-biggest economy.</p> <p>The property developer also announced plans to give future priority to its electric vehicles business over real estate. </p> <p>Facing a deadline on Saturday to pay interest on a U.S. dollar bond, Evergande sent $83.5 million to a Citibank trustee account on Thursday, the person with knowledge of the matter told Reuters.</p> <p>That brought relief for investors and regulators worried about fallout for global markets and added to reassurances from Chinese officials that creditors would be protected.</p> <p>Still, the world’s most indebted property firm – with more than $300 billion in liabilities – needs to make payments on a string of other bonds, with the next major deadline to avoid default on Oct. 29.</p> <p>With little known about its ability to pay and property sales tumbling 30% in the last 12 months, there is deep scepticism over Evergrande’s capacity to ride out the crisis.</p> <p>The company, once China’s top-selling property developer, did not respond to a request for comment on debt payment.</p> <p>Citibank declined to comment. </p> <p>Evergrande chairman Hui Ka Yan said on Friday the company would aim to make its new electric vehicle venture its primary business instead of property within 10 years.</p> <p>Property sales will slow to about 200 billion yuan ($31.31 billion) per year by that time, compared to more than 700 billion yuan last year, he was quoted as saying by the state-backed Securities Times.</p> <p>Evergrande’s new vehicle business, founded in 2019, has yet to reveal a production model or sell a single vehicle. Last month, the unit warned it was still seeking new investors and asset sales, and that without either it might struggle to pay salaries and cover other expenses.</p> <p>‘<span class="caps">BIT</span> OF A <span class="caps">RELIEF</span>’</p> <p>Evergrande’s overall woes have snowballed for months and its dwindling resources set against its vast liabilities have wiped out 80% of its value.</p> <p>Founded in Guangzhou in 1996, the developer epitomised a freewheeling era of borrowing and building. But that business model has been scuttled by hundreds of new rules designed to curb developers’ debt frenzy and promote affordable housing.</p> <p>It was not clear how cash-strapped Evergrande was able to raise funds to pay the bondholders or whether any had already received the money. Evergrande next needs to find $47.5 million by Oct. 29 and has nearly $338 million in other offshore coupon payments coming up in November and December.</p> <p>“While obviously a positive, the coupon payment does not address the overall concerns about Evergrande’s sustained liquidity through the first maturity in Q2 2022 and beyond,” said John Han, a partner at law firm Kobre & Kim in Hong Kong.</p> <p>“This only shows that the company is not yet ready for the house to come down completely through a massive cascade of cross defaults. Time is needed for what is planned next.”</p> <p>If it fails to make next week’s payment, or any other final deadlines in coming weeks, defaults would be triggered on all $19 billion of its bonds in international capital markets. </p> <p>That would be the second biggest emerging market corporate default after Venezuela’s state-owned oil firm.</p> <p>Evergrande missed coupon payments totalling nearly $280 million on its dollar bonds on Sept. 23, Sept. 29 and Oct. 11, beginning 30-day grace periods for each.</p> <p><span class="caps">DISTRESSED</span> <span class="caps">LEVELS</span></p> <p>Evergrande’s dollar bond prices surged on Friday morning after news of the transfer, with its April 2022 and 2023 notes jumping more than 10%, data from Duration Finance showed, though they still traded at deeply distressed levels of less than a quarter of face value.</p> <p>Those gains evaporated on Friday afternoon in Asia, however, pushing several of the company’s other bonds down more than 6%.</p> <p>Evergrande’s shares rose as much as 7.8% before closing up 4.3%, but still finished a shortened week down 8.8%. </p> <p>Evergrande’s woes have reverberated across the $5 trillion Chinese property sector, which accounts for a quarter of the economy by some metrics, with a string of default announcements, rating downgrades and slumping corporate bonds.</p> <p>Chinese property companies could now be locked out of offshore debt markets until early next year.</p> <p>Still, Friday’s news helped the Hang Seng mainland properties index rise 3.3%.</p> <p>In mainland markets, the CSI300 Real Estate index finished up 2.4%, and an index tracking the broader property sector added 2%.</p> <p>Asked whether it would step in to help its rival ease its liquidity crisis, the chairman of China’s third-biggest developer, China Vanke Co Ltd, said developers needed to ensure their own safety first.</p> <p>“Everyone feels the chill as ‘winter’ arrives for the sector,” Chairman Yu Liang told a company forum.</p> <p>Any prospect of Evergrande’s demise raises questions over more than 1,300 real estate projects it has in some 280 cities.</p> <p>Bank exposure to developers is also extensive. </p> <p>A leaked 2020 document, branded a fake by Evergrande but taken seriously by analysts, showed the company’s liabilities extended to more than 128 banks and over 121 non-banking institutions.</p> <p>“Given that we have little clarity on how bank financing is going for stalled real estate projects, but we know that project pre-sales are down a lot, the onshore business is unlikely to be supplying cash to Evergrande near-term,” said Quiddity’s Lundy.</p> <p/> </div>