Zombified Evergrande will haunt for years to come

Fantasia Holdings

24/03/2023 24:27

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
       LONDON, March 23 (Reuters Breakingviews) - China
Evergrande  3333.HK  and its $300 billion of liabilities is a
problem somewhat built to last. After dragging its feet for
almost a year, the world’s most indebted developer finally
unveiled a plan to restructure some $20 billion of offshore
debt. It’s an underwhelming deal for that group of borrowers and
the next focus will be the anxieties of the company’s lenders,
suppliers and homebuyers inside the People’s Republic. 
    Creditors can either accept new notes that only mature in
another decade, taking in most cases at least a 50% haircut on
the coupon, or go for new notes with slightly shorter duration
and instruments linked to itself and its two struggling Hong
Kong-listed subsidiaries. These include scandal-hit Evergrande
Property Services, that has had almost all its cash seized by
banks, and China Evergrande New Energy Vehicle, the heavily
indebted unit with merely a few hundred cars produced so far. 
    One key bondholder group is already signed up and other
creditors will probably follow. While there’s no personal
capital injection from Chairman Hui Ka Yan, as was the case in a
restructuring by smaller peer Fantasia  1777.HK , he’s also
facing a court order to dissolve the parent company. A Deloitte
analysis in the proposal figures unsecured offshore creditors
stand to recover 2% for their investment, or 9% at best for
those holding senior notes if they reject the plan and force a
liquidation. 
    What follows isn’t likely to be much prettier. The developer
shared preliminary details on its finances for the first time
since mid-2021: It had less than $200 million in unrestricted
cash by end-2021 and liabilities outstripped assets, resulting
in a negative equity of $29 billion.  
    Beijing needs to keep Evergrande afloat long enough to
ensure it finishes building a large trove of presold apartments;
around 600,000 in 2020. The company estimates it would need up
to 300 billion yuan ($44 billion) to carry out that task. Most
of its unlevered cash flow will be put towards that purpose in
the next three years. Evergrande may have achieved a key
milestone in fixing its debt mess. But its zombified state will
haunt Chinese real estate for a long time to come. 
    Follow @ywchen1 on Twitter
    
    CONTEXT NEWS
    Chinese property developer China Evergrande on March 22
published a restructuring plan for its offshore debt, according
to a filing to the Hong Kong Stock Exchange.
    In the two main options proposed, creditors can either swap
all of their holdings into new notes with maturities of up to 12
years, or convert them into different combinations of new notes
with tenors of five to nine years and equity-linked instruments.
The coupon on the new notes ranges from 2% to 8% depending on
the type of debt they hold, whether they are paid in cash, and
the seniority of their debt.
    Bondholders of notes issued by Evergrande's offshore units
also will be allowed to exchange their existing debt for new
notes, which will start paying coupons from the fourth year
after issuance. 
    A key bondholder group had agreed to its proposed terms,
Evergrande said on March 20, without specifying how much of the
debt it held. It also said the company expects its overdue
financial reports for 2021 and 2022 to be released in April and
May.
    A recovery analysis by Deloitte shows investors' recovery
rate is no more than 9% in the event of liquidation, Evergrande
added in its filing. 

 (Editing by Una Galani and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  CHEN/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | yawen.chen@thomsonreuters.com; Reuters Messaging:
yawen.chen.thomsonreuters.com@reuters.net))