By Tom Westbrook and Donny Kwok
HONGKONG -Debt-saddled China Evergrande is set to raise more than $5 billion by selling a majority stake in its property management arm, Chinese media said on Monday, a deal which would be the struggling giant’s largest asset sale yet if it goes ahead.
Once China’s top-selling property group, Evergrande is facing one of the country’s largest-ever defaults as it struggles with more than $300 billion of debt. Its fate is also unsettling global markets wary about the fallout of one of China’s biggest borrowers toppling.
Evergrande on Monday said it requested a halt in the trading of its shares in Hong Kong pending an announcement about a major transaction. Evergrande Property Services Group, a spin-off listed last year, also requested a halt and said it referred to “a possible general offer for shares of the company.”
China’s state-backed Global Times said Hopson Development was the buyer of a 51% stake in the property business for more than HK$40 billion ($5.1 billion), citing unspecified other media reports. Hopson also said it had suspended its shares, pending an announcement related to a major acquisition of a Hong Kong-listed firm and a possible mandatory offer.
Neither Hopson nor Evergrande responded to requests for comment on the Global Times report.
Analysts said the possible deal signals the company is still working to meet its obligations. But it also underscored concerns about the rest of China’s property sector and the broader economy if there is a fire-sale of Evergrande’s assets.
“Selling an asset means they are still trying to raise cash to pay the bills,” said OCBC analyst Ezien Hoo. “Looks like the property management unit is the easiest to dispose in the grand scheme of things.”
There was another key development in the sector on Monday too as one of Evergrande’s smaller rivals, Fantasia Holdings’, said it had missed a $206-million bond payment deadline.
Credit ratings agency Fitch had slashed the firm’s credit rating by four notches earlier in the day, too, after the firm revealed it had underwritten another bond that it had previously not disclosed on its books.
With a market value of $415 million, Fantasia is a minnow. But its missed deadline adds to worries of a sector-wide crunch that could put further pressure on China’s already slowing economy.
The $5 billion Evergrande would earn from its reported sale meanwhile would theoretically cover the firm’s international bond payments for the next six months. It has around $500 million in coupon payments due by the end of the year, followed by a $2-billion dollar bond maturity in March.
The price represents a roughly 17.5% discount to the Services Group’s December 2020 listing valuation, although Evergrande’s group shares have slumped 80% since then.
In contrast, Hopson’s shares have jumped 40% this year making it worth around HK$60 billion ($7.8 billion).
Evergrande’s property services business, which says it managed a total contracted floor area of 810 million square metres at the end of June, was also profitable in the first half of 2021, based on its financial statements.
With liabilities equal to 2% of China’s gross domestic product, Evergrande has sparked concerns its troubles could spread through the global financial system.
Nervousness has eased after China’s central bank vowed to protect homebuyers’ interests, but ramifications for China’s economy kept investors on edge – particularly as signs of distress have begun spreading to Evergrande’s peers.
Monday’s share trading suspension knocked the offshore yuan, which fell about 0.3% against the dollar, and weighed on the Hang Seng benchmark index.
Still, the possible deal activity lifted shares in Evergrande’s electric vehicle unit by 29% but cast a pall over regional stocks and global markets. [MKTS/GLOB]
“It is definitely a positive move towards solving Evergrande’s liquidity crisis and we expect more to come,” said Gary Ng, senior economist Asia Pacific at Natixis.
“However, having said that, offloading some assets may not be totally sufficient, the key for Evergrande is to get project construction going and to sell inventory.”
Shares in Evergrande have plunged 80% so far this year, while its bonds have held steady at distressed levels.
The group said last month it had negotiated a settlement with some domestic bondholders and made a repayment on some wealth management products, largely held by Chinese retail investors.
Holders of the company’s $20 billion in offshore debt appear further back in the creditor queue and bondholders have said interest payments due in the past few weeks have failed to arrive.
Evergrande faces deadlines on dollar bond coupon payments totalling $162.38 million in October.
($1 = 7.7868 Hong Kong dollars)