Zombified Evergrande will haunt for years to come
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.
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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
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